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Structure of Public Debt in Nepal


A THESIS Submitted to the Central Department of Economics Faculty of Humanities and Social Sciences, Tribhuvan University In Partial Fulfillment of the Requirements For the Degree of MASTER OF ARTS (M.A.) in Economics

By

[Your name here]


Roll No.: 195/ 063-64

Central Department of Economics Tribhuvan University, Kirtipur, Kathmandu

April, 2010

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CONTENTS
Page No. Recommendation Approval Letter Acknowledgements Contents List of Tables List of Figures Abbreviation CHAPTER ONE: Introduction 1.1 General Background 1.2 Statement of the Problem 1.3 Objective of the Study 1.4 Significance of the Study 1.5 Limitation of the Study CHAPTER TWO: Review of Literature 3.1 Introduction 3.2 Theoretical Review 3.3 International Review 3.4 Nepalese Context CHAPTER THREE: Methodology 2.1 Research Design 2.2 Sources of Data 2.3 Methods of Data Analysis 2.4 Simple Regression Equation 2.5 Working Definition of Terminology 1-4 1 2 3 3 4 5-16 5 5 10 14 17-19 17 17 18 18 19

CHAPTER FOUR: Role of Public Debt in Nepalese Context 4.1 Introduction 4.2 Public Borrowing and Deficit Financing 4.3 Public Debt and Mobilization of Resources 4.4 Fiscal Condition in Nepal 4.5 Public Borrowing and Economic Development 4.6 Problem of Borrowing in UDCs

20-30 20 22 24 26 27 29

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CHAPTER FIVE: Trend and Structure of Public Debt in Nepal 5.1 Introduction 5.2 Resource gap in Nepalese Economy 5.3 Export- Import Gap 5.4 Saving-Investment Gap 5.5 Fiscal Situation in Nepal 5.6 Sources of Financing Deficit 5.7 Growth Trend of Government borrowing 5.8 Structure of Net Internal Debt in Nepal 5.9 Pattern of External Debt in Nepal 5.10 Net outstanding Public Debt in Nepal CHAPTER SIX: Burden of Public Debt 6.1 Introduction 6.2 Debt servicing Issues in Nepal 6.3 Share of Internal and External Debt Servicing in Regular Expenditure and Total Revenue 6.4 Development Expenditure, Net Outstanding of Public Debt and Debt Servicing 6.5 Percentage of Internal Debt Servicing to Annual Internal Debt 6.6 Issues of Foreign Loans 6.7 Net outstanding External Debt and GDP 6.8 Outstanding External Debt and Import 6.9 Trend of Debt Servicing and External Debt CHAPTER SEVEN: Empirical Analysis 7.1 Introduction 7.2 GDP and Internal Debt 7.3 GDP and External Debt 7.4 Effects of Internal and External Debt on GDP 7.5 Effects of Total Debt on GDP CHAPTER EIGHT: 8.1 8.2 8.3 8.4 Summary, Major Findings, Conclusion and Recommendations

31-54 31 32 36 39 41 43 45 48 49 52 55-77 55 58 62 64 67 69 71 73 75 78-84 78 78 79 81 82

Summary Major Findings Conclusion Recommendations

85-94 85 86 91 92

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Annexes Bibliography

List of Tables
Table No. 5.2.1 5.3.1 5.4.1 5.5.1 5.6.1 5.7.1 5.8.1 5.9.1 5.10.1 6.2.1 6.2.2 6.3.1 Name of Tables Different Scenarios of Resource Gap Trend of Export and Import Tend of Saving and Investment Ratio of Government Expenditure and Revenue to GDP Public Debt as percentage of Fiscal Deficit Growth Trend of Government Borrowing as Percentage of GDP Ownership Pattern of Net Internal Debt Pattern of External Debt in Terms of Disbursement by Major Sources Net outstanding Public Debt to GDP Ratio Trend of Debt Servicing and GDP Trend of share of Principal and Interest Servicing to Total Debt Servicing Share of Internal and External Debt Servicing in Total Revenue, Regular Expenditure Outstanding of Public Debt, Development Expenditure and Debt Servicing Annual Internal Debt Servicing as Percentage of Annual Internal Net Outstanding External Debt and GDP Ratio of External Outstanding Debt and Imports Payments External Debt and Its Servicing Trends Page 34 37 40 42 44 46 48 50 53 59 61 63

6.4.1 6.5.1 6.7.1 6.8.1 6.9.1

65 68 72 74 76

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List of Figures
Figure No. 5.2.1 5.3.1 5.7.1 5.9.1 5.10.1 6.2.1 6.4.1 Name of the Figures Different Scenario Resource Gap in Nepal Trend of Import Export Gap Growth Trend of Government Borrowing Pattern of External Debt Net Outstanding Public Debt in Nepal Pattern of Internal and External Debt Servicing Patten of Development Expenditure, Debt Servicing and Total Outstanding Public Debt Page 36 38 47 52 54 60 66

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ACKNOWLEDGEMENTs
I wish to express my cordial gratitude and sincere respect to my teacher esteemed supervisor Prof. Bijaya Shrestha, Central Department of Economics for her inspiring help and valuable guidance during the course of writing this research work as well as other teachers of CEDECON for their encouragement and suggestions. I would like to express my gratefulness to Prof. Dr. Sohan Kumar Karna, Acting Head of the Central Department of Economics, who provided me the opportunity to write this thesis. My veneration goes to all my respected teachers and personnel of CEDECON who conveyed their timely and significant suggestions for this thesis both at formal and informal meetings. I would also like to appreciate to different organizations, institutions and individuals who helped me in this matter. I would like to express my gratitude and appreciate to my husband Mr. Basanta Lamichhane, other family members and my friends Mr. Binod Khadka, Mr. Shyam Pant and Umesh Khatiwada for helping their genuine support to complete this thesis. Despite my almost care and efforts, I bear the full responsibility for any errors and discrepancies that might have occurred in this study report.

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Name Here]

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ABBREVIATION
ADB CBS EDO EP FY GDP IMF IP LDCs MOF NRB UDCs UN UNDP WB Asian Development Bank Central Bureau of Statistics External Outstanding Debt Export Payment Fiscal Year Gross Domestic Product International Monetary fund Import Payment Least Developed Countries Ministry of Finance Nepal Rastra Bank Under Developed Countries United Nations United Nations Development Program World Bank

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CHAPTER-ONE

Introduction
1. 1. General Background
Public debt is an important source of government financing. It is widely used as a means of financing development activities in underdeveloped country. The government of the country gets its income from two sources namely, public revenue and public debt. Public revenue therefore consists of the money that the government is not obliged to return to the every individual from whom it is obtained. But public debt/ borrowing taken by government is an obligation of repayment of principal sum borrowed plus a stipulated rate of interest after its maturity period to persons institutions and foreign countries. Public debt comprises of both internal and external sources of government. Internal sources include borrowing from individuals and from banking sector. External sources includes foreign loans, grants and from bilateral and multilateral agencies.

Public debt is the major source of fund for development activities basically in developing countries. Nepal is facing a serious and growing resources gap problem on the one hand and increasing inflation and population growth on the other. As internal revenue generation such as tax revenue, surplus of public undertaking are inadequate in comparison to resource requirements, government takes public debt from both internally and externally. Therefore, the need of public debt as a source of resource mobilization for development financing and to strengthen the economy is a comparatively modern phenomenon and has come into existence with the development of a democratic form of government.
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Taxation is no doubt, the most important source of government financing to build up socio economic infrastructure such as health education, transportation, communication etc. for economic development. But it is quite impossible to raise adequate fund through taxation in underdeveloped countries because of poor tax payable capacity of the people. The only way to collect the needed fund is public debt. Debt can be taken from citizens as well as foreigners. Hence, public debt is taken as balancing items of increasing trends of fiscal deficit.

Nepal is heavily dependent on internal as well as external public debt for development. Since developing countries like Nepal always needs foreign currencies to import many capital goods required for development. The trend of borrowing through external source is very high in Nepal as compared to internal source. Hence in both developed as well as developing countries are making public debt as a main source of resource mobilization to meet budgetary deficit.

1. 2. Statement of the problem


Developing countries like Nepal are always facing the problem of fund needed for developmental projects. Government collects such fund from internal and external borrowing. The external borrowing is increasing more rapidly than internal debt due to wide gap between saving and investment, revenue and expenditure and exports and imports.

In Nepal, every year budgetary deficit is growing in which effective management of available resources are needed. The proposition of government borrowing and debt servicing obligation are increasing rapidly. To maintain the resource gap, debt is only
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one solution, which helps to increase the amount of debt. In the context of Nepal the increasing size of public debt to maintain fiscal deficit is challenging proposition. So, public debt in Nepal is a matter of concern.

In the underdeveloped countries like Nepal, domestic resources are inadequate to meet the financial requirement for the economic development due to low income, low saving and low capital formation. So it creates the low internal debt in Nepal. Thus, Nepal is more dependent on external debt than internal one. This ever increasing trend of debt servicing of the country creates a great problem for debt management and becoming a major challenging issue for the country. Foreign assistance has become major source of financing development expenditure.

The burden of public debt is very controversial issue because government has taken loan for peace and securities which are unproductive sectors. The total outstanding debt is around 55 percent of GDP and more than 50 percent of development budget is shared by foreign loan in each periodic plan. So Nepal is heavily dependent on foreign aid. To break the vicious circle of poverty and to improve social condition of people, there is greater demand of debt. So the current situation of public debt in our country makes us to think seriously about it.

1. 3. Objectives of the study


a) To analyze the role of public debt in Nepalese context. b) To analyze trend and structure of public debt. c) To analyze the burden of public debt. d) To identify the debt servicing problem in Nepal. e) To recommend suitable policy measure for optimum utilization of debt.
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1. 4. Signification of the study


The government needs a huge amount of resources for reconstruction, rehabilitation and relief to make modern and prosperous society. In this regard, public debt can be a major source of revenue mostly in developing countries like Nepal due to low level of tax payable capacity of the people.

For economic development of Nepal government must invest on various sectors such as education, health, transport, communication etc. To build up such overhead capital there is need of heavy fund, which is possible only through government borrowing due to low tax payable capacity of the people. Similarly, to break the vicious circle of poverty and to improve social condition of the people, there is greater need of public debt.

As the revenue surplus has not been adequate to meet the development expenditure, the deficit budget has remained the prime feature of Nepalese fiscal policy. been mobilized. Due to this reason, the value of total loan has been rising and the burden of debt servicing has been increasing year by year. This situation leads the government to become more indebted from external as well as internal borrowing.

The study of public debt is concerned to maintain high level of employment, a reasonable degree of price level stability, balance in foreign accounts and an acceptable rate of economic growth. This study will also be concentrated on the mobilization of financial resource through appropriate utilization of public debt. It is also applicable for the people and institution to purchase government securities. It is also written hoping that it will be a little reference for the budgetary system.
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1. 5. Limitation of the study


This study is fully based on secondary data. No attempt is made to check the reliability of the secondary data. This study is covered only the period of 23 years (1985/86 2007/08) because of time and resource constraints. This study is not related to examine the effects of public debt on macro economic variables such as national income employment, price level, money supply etc

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CHAPTER TWO Literature Review


2. 1. Introduction: Public debt as an important source of deficit financing refers to the obligation of government to pay back to the person, institution or countries from whom it has been obtained. Generally, public debt refers to loan raised by a government within the country or outside the country. Every government like individuals has to borrow when its expenditure exceeds its revenue. Encyclopedia Britannica (1959), defines that public debt is obligation of government, particularly those evidenced by securities, to pay certain sums to the holders at some future date.

In the literature of public debt different economists have different views regarding the public debt. Generally, Classical, Keynesian and Post Keynesian economists have different aspect towards public debt.

2. 2. Theoretical Review Review of Classical Thinking:


The classical economists were generally against the public borrowing and favored the minimum role of government. They assumed that individual, consumer and business firm employ resources more efficiently. According to them, economic activities are best in private sector because they have the greed of profit, through which allocation of resources would be more efficient. On the other hand, government does not have such greed. Due to this, they are in favor of limit/slim size of public sector and reduce the function of government to the minimum possible extent. They further believed that any
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government intervention into the economic activities results into rigidity and disrupt the smooth functioning. This would help to bring about the optimum allocation of resources and the achievement of full employment and maximum output. Under a fully employed economy, therefore government can acquire resources by borrowing only at the cost of private sector where they are more fruitfully engaged. The classicists were not against any form of government expenditure. What they favored was minimum public expenditure. In between taxation and borrowing, classicists favored taxation for the following reasons: a. Deficit financing means an increase in public debt. Since it is an easy method to obtain income, government is likely to be extravagant and irresponsible. Consequently, public debt will definitely become a burden to the economy. b. Payment of interest on public debt and refunding of the principle will require additional taxation. It might prove to be difficult since governments power to tax is not unlimited. c. Deficit financing might produce currency deterioration and price inflation However the classical economists were not against all type of public debt. They favored public debt for self liquidating projects. In the words of R.A. Musgrave, Self liquidating projects may be define narrowly investment in public enterprises that provide the fee or sales income sufficient to service that debt incurred in their financing, or they may be defined broadly as expenditure projects that increase future income and the tax base. Such projects permit servicing (interest and amortization) of the debt incurred in their financing without requiring an increase in the future level of tax rates. ( Musgrave, 1959)

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Review of Keynesian Thinking


Unlike the classical economists, Keynes did not accept the notion of free enterprises economy, which is self-equilibrium at full employment level. He advanced the concept of underemployment equilibrium. He argued that resources in the private sector might remain unemployed for relatively longer time period if the government becomes unconscious. In such situation when resources are unemployed on large scale, government employment of these resources does not necessarily deprives the private sector of anything. On the contrary, increasing government spending by using idle men and materials is likely to raise the level of aggregate demand and thereby aggregate output and income. Hence public borrowing/ debt need not necessarily be unproductive, and burdensome. Due to this, Keynesian strongly prescribed to increase the public expenditure even by undertaking deficit financing or borrowing.

For Keynesian, if debts are internally held, there is nothing to worry about their size. It is because such debt involves merely a series of transfer payments and they cancel out for the economy as a whole. Hence the only concern was on high level of income and employment. This has emerged the concept of double budget. But Keynesian view is that deficit budget even by undertaking public debt, would be a powerful tool during the time period of stagnation/ depression.

Review of Post Keynesian Thinking


During the Second World War II and post world war period, the size of public debt and servicing increased enormously. This has made the economist to make revision on the aspect of public debt. The post Keynesian development was that it emphasizes the transfer and management aspect as well as interrelationship between public debt and money supply.
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The Post Keynesian economist like Learner also shares the view that internal debt inflicts no burden simply because it is a transfer of fund from one pocket in the other from the left hand to the right hand. He further maintains, An inter-personal of international loan yields the borrower a real benefit, it enables him to consume or invest more than he is earning or producing. And when he pays interest or repays the loan he must tighten his belt, reducing his consumption or his investment. In the case of national debt were have neither the benefit nor the burden, the belt cannot be let out when borrowing need not be tightened when repaying. (Poudel, 2005).

It cannot be denied that internally held public debt involves a series of transfer payments in the form of taxes and debt service payment and for the economy as a whole, they cancel out. But the volume of public debt cannot be dismissed as of no consequences. This is because heavy debt constitutes of burden for future generation. The post Keynesian did not reject the entirely classical notion regarding to public debt rather put it in a better perspectives:

a. According to them, public borrowing does not always deprive the private sector from the use of resources. As for example during the time period of widespread unemployment, it may be productive b. Besides, it is not accepted now that borrowing in the period of full employment must be inflationary. If the borrowing taps the funds otherwise used of consumption, it is not more inflationary c. A large public debt if internally held poses many problems for the economy. It complicates the monetary policy and creates difficulties of management and so on.
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d. In resorting to borrowing, government should be guided by macro economic considerations- its effects on macro economic variables.

Recent Thinking
Recent thinkers opined that heavy growth of the borrowing is dangerous for the economy for two reasons: Firstly ,growth of debt ratio may lead crowding out of private investment; Secondly, government spending out of borrowed funds might be unproductive. (Ponser;1992) They observed that, that part of public debt is burdensome whose servicing falls entirely or mostly on tax revenue. If its servicing does not fall entirely on tax revenue, it is not burdensome rather it is productive. Because it itself generates resources for its debt service besides income, employment and output. Therefore all debts are not burdensome.

According to modern economist Raja J. Chelliah observes that. If revenue will meet subsides, other transfers, interest payments and the greater the part of current expenditure; debt finance will be used for meeting the governments non-remunerative capital formation; and the total domestic borrowing will be determined in such a way that, given the rate of domestic saving, the non-government sector will be able to obtain a due share of saving and that there will be no need to borrow form the central bank more than the correct amount of saving and the there will be no need to borrow from the central bank more than the correct amount of seignior age, it is the ideal situation for borrowing. It can be presented in another ways also:

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The level of government borrowing is the function of ability and willingness of person and business to lend and the governments power and intention to tax. Maximum level of debt can be expressed in terms of the following equation: (Singh, 2004)

D=

Yt E r

Where, D= maximum sustainable national debt O= Constant expenditure of ordinary government operation t = maximum ratio of tax receipts to national income (Y) and r = contractual interest rate of government debt. However, the burden of debt depends upon the nature of investments, productive or unproductive. If it is productive, there will not be a burden because of creation of real asset in the economy which further generates income of the people thereby increasing national income. If it is unproductive, the situation will naturally be burdensome on the government.

2. 3. International Review
Bhargava viewed that the government borrowing is also useful to combat against inflation because in this situation effective demand is more than the available supply of goods and services and here the government transfers extra purchasing power from the hands of the people. Thus, a sensible debt policy can be used to check a depression or a boom. ( Bhargava, 1956: 191)

Taylor Philip E. (1968), in his book entitled The Economics of Public Finance has analyzed the nature and the burden of public debt upon the economy on of the upon which fiscal policy must stand, without it the financing of public emergencies would be impossible. Public debt is desirable, no matter what its burden when incurred for the
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purpose of securing benefits which outweigh the burden. In this sense debt is a necessary evil, like cost of production; if the benefits could be secured with fewer burdens the alternative would be preferable.

The burden of public debt is represented by the economic hardship which it imposes. This hardship may take the form of waste of productive efficiency for the economy as a whole or undesirable economic burdens imposed upon particular classes. The possibility of inflation resulting from the form of borrowing constitutes another elements of burden. The urge given by Taylor to reduce debt principle may involve three kinds of burden. The raising of taxes for debt retirement by a regressive tax system will take funds for those less able to pay and transfer these funds to bond holders who gain relatively little benefit from their receipt Reduction of expenditure on expenditure on useful government function will impose bur den upon prior beneficiaries of those function. Taxes to repay debt held by the bank may result in net destruct ion of a part of the circulating medium. Certainly the most important single determinant of debt burden is the level of national income. The existing high level of public debt makes this the overriding consideration in minimizing debt burden. Sensible approach to the analysis of debt burdens requires that the size of debt principle be de-emphasized. For as we have seen, not only are the transfers of income which constitute debt burden principally those which relate to interest and not principle payments, but the size of principle is inaccurate measures of the magnitude of these transfers. The principle determinants of debt burden pointed by Taylor are:
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The magnitude of annual transfers for debt service . The pattern of debt ownership within the economy. The type of tax system. The level of national income. Post Keynesian economists Richard Goode views that borrowed money when used to finance public investment causes no such reduction. All that will happen is the change in the consumption of capital formation. The inference is that failure to restrict borrowing to the investment will retard economic growth. A weakness of the argument is that not all outlays classified as investment actually contribute to growth, while some expenditure usually as government consumption promote growth ( Goode, 1984: 198)

According to new Palgrave dictionary of economics 1988, Public debt is a legal obligation on the part of government to make interest or amortization of payment to holder of designated claims in accordance with a defined temporal schedule. It is created through the government borrowing from individual, corporations, institutions and other government. It refers to loan raise by government within the country or outside the country. Every government like individual has to borrow when its expenditure exceeds revenue. The receipts from the sale of financial instruments by government to individual or firms, in the private sector to induced the private sector, to release manpower and real resource and to finance the purchase of those resources or to make welfare payments or subsidies.

Trippen (1990), in his article pointed out that debt of the banks in 1980s prevented the international financial system form collapsing, still there was not financial situation of debt problem in sight yet. He observed capital flight from Latin American countries was

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a symptom of seriously economic, social and capital problems in consequence of the debt crisis. The valued currencies and negative real interest rates.

Nadim(1992), in his article entitled External debt policy has analyzed the origin of debt problems. The debt crisis had its origin in the substantial rise in the external liabilities of the developing countries during the second half of the 1970s and early 1980s, in an environment of large scale recycling of the oil exporters surpluses rising world inflation and negative real interest rate. At the time many viewed this recycling of funds as a positive development; creditors were able to identify now investment out less and debtors could acquire funds needs for development purposes. He again explained that an external debt crisis was due to: A drastic deterioration in external economic environment in the form of higher interest rates, lower commodity price and severe recession in the industrialized economies; Economic mismanagement and policy errors in debtor countries and Excessive lending by commercial banks to some countries, with little regard to country risk limits.

According to Gurley and Shaw, it is applied for the maintenance of balance between the expenditure and revenue for financing economic development, since developed or developing and revenue for financing economic development, since developed or developing countries always face the problem of fund, which is reflected in a large extent and as ever increasing financial resource gap in government budgetary. Therefore the selection of appropriate method for financing development is very important for the success of a development plan. Various methods to be adopted mobilizing financial resources and their implication for the economy are among the leading issues in economic development. Finance aspects are as important as the other
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aspect of economic development and their study should be received proper attention (Gurley and Shaw, 1995: 575)

Buiter (2001), observes, The government borrows only to finance public sector formation can not be easily rationalized in terms of generally accepted economic principles. At worst it could become a straight jacket on the fiscal and financial strategy. It also risks inducing a misplaced sense of complacency about the accumulation of public investment related to public debt. Debt must be serviced through future higher current revenues or lower public spending regardless of what motivated its issuance.

2. 4. Nepalese Context Dissertation Review


Purushottam Achary a in his M.A. these entitled A case study of public Debt in Nepal states public debt is most popular in these days because of payment of debt on maturity can be adjusted through the issues of fresh public debt instruments. But the fact is that habit of purchasing bond issued by the government should be developed among the people so that no difficulty may be faced in getting the bond purchased by the people. (Acharya, 1968).

The dissertations entitled Structure of Public Debt in Nepal (1982) by Mahesh Raj Joshi in his M.A. dissertations has analyzed the structure of public debt in Nepal and the importance of public debt and financial development. Birju Prashad Sharma, in his dissertation Paper entitled Public Debt in Nepal in 19 87, has tried to show the relationship between public borrowing development expenditure and budgetary deficit.

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An article on The role of foreign aid and Economic development and Poverty alleviation by Kishor Kumar Gurugharana in 1996 analyzed the burden of public debt as debt servicing cost in Nepal and has come to the conclusion that the long term upward trend of increasing debt burden inflict greater burden. He finally said that through the loan component of foreign aid, Nepal is softer than other countries like India and China, yet the very low rate of return and rapidly increasing volume of debt is slowly bring in Nepalese economy towards crises of debt trap.( Gurugharana, 1996)

Urmila Adhikari (1996) in her article entitled, Foreign Debt Servicing, A Case Study analyzed the foreign debt- servicing problem in Nepal. She found that substantial increasing in foreign between the periods of 1974/75 to 1993/ 94. She prescribed effective implementation of liberalization policy in area of investment. This can bring a great relief to the country by creating capacity for foreign exchange earning which can reduce burden of debt servicing substantially in the years to come.

An article on debt Management by Annathakrishan (1998), opines, IF a country borrows from abroad, it has repay the principle and interest the capacity to pay the debt service cost should be realized by investing the borrowed funds into increased production activity. The increase production consumption but would also increase exports. Only then can a country find funds to pay the debt service cost. He emphasized mostly on productively used of available public debt then only it helps to raised national income and GDP. Hence borrowing can increase economic welfare in both lending and borrowing countries. Laxmi Bilas Koirala (2002), in his article entitled Effective Public Debt Management in Nepalese Perspective. States that debt is a useful resource for economic development, several inverse consequences were found by its over use. The debt crisis of nineties eighties is widely known as the result of over use. The World Bank has
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established multilateral insurance Guarantee Agency (MIGA) and the international monetary fund has minted special drawing right (SDRs) to cubs the crisis in the third world. He further opines that we have only two options; either mobilize more foreign debt to invest for economic development or put the hand on hand doing nothing. In a not shell, we should have a debt management plan for its better use and regularly servicing. The government debt has a simple relationship whit the government deficit, the increase in the government debt over a given year is equal to the budget deficit, the increase in the government debt over a given year os equal to the budget deficit of a higher economic growth requires a higher level of investment that is not possible simply from taxation so that government seeks public borrowing (Koirala, 2001)

Tirtha Raj Poudyal (2003) has submitted a dissertation paper titled Trend and structure of public debt in Nepal has analyzed borrowed fund from external resources produce expectable items and there should be constituted a committee to supervise and narrator and to control unnecessary foreign borrowing. The role of government in dominating private sector in all sectors of the economy in Nepal. Thus t he government should adopt appropriate economic policy. The government should give attention in all sectors of the economy with high economic growth rate by reducing excessive external dependency and internal resource mobilization for the development purpose and the economy will be capable to move in a self sustaining growth path.

Subedi, Rewat (2004), in his thesis A case study of Public Debt in Nepal has tried to study the debt situation with following objectives. To analyze the trend and structure of Debt in Nepal. To identify the debt servicing problem. To measure the burden of debt in Nepal.
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He found that Nepal is going on indebted and it will fall on debt crisis of the strong obligation and commitments are not made. The burden of interest payment is higher than the burden of principle payment in Nepal. Growth rate of external debt in Nepal is faster than the growth rate of export earnings. Finally he has concluded that due to the depreciation of Nepalese currency vis-a vis the convertible foreign currency, the burden of debt servicing has been increasing year by year.

Thapa(2005), observes that, Although Nepals debt burden and its servicing should not be called as excessive, on the basis of its level of development, it is quite burdensome. Debt burden has reached this level even to achieve such meager development. Nepal has not taken high growth path so far and once it takes it will re quire enormous of investment and that investment will have to be made through borrowing from both domestic as well as the external sources. At that time Nepal will have to borrow an unlimited amount of financial resources form both the source. Therefore, until growth rate takes momentum, we should be extremely judicious while borrowing to finance the budget deficits.

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CHAPTER - THREE Methodology


3. 1. Research Design
To meet the earlier mentioned objectives, the study has used both qualitative analysis. The nature of the study is descriptive and the study is based on secondary data. This research will have tried to show the trend and structure, role and burden of debt. Historical data form of last 23 years from FY 1985/86 to 2007/08 have been taken into account.

3. 2. Sources of data
This study is based on secondary sources of data and information, which have been issued and published in books, magazines and reports, journals etc. Most of the data are taken from the publication of: Publications of Nepal Rastra Bank. Publications of Ministry of Finance. Publications of Central Bureau of Statistics, C.G.O Newspaper, published articles on different journals and magazines. Publications of International Monetary Fund. Dissertation available at the central library of T.U. Publications of world Development Report and Publications of world Bank etc. Internet, e-mail

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3. 3. Method of Data Analysis


The collect data from various relevant sources is processed according to the need of the chapter. The available data from various documents are collected, classified and tabulated to meet the needs of the study. Some statistical tools such as percentage distribution, average annual growth rate and trend analysis are used for analyzing the data when they are necessary.

3. 4. Simple Regression Equation


It establishes the relationship between dependent and independent variable. It is used to show the degree and direction of the relationship between variable and it also provide a mechanism for prediction or forecasting. Here, to explain the role of public debt on economic growth, a simple ordinary least square linear regression model has been used. The theoretical statement of this model is that Gross Domestic Product (GDP) depends upon the Internal Debt and External Debt. This shows the relationship between GDP and public debt.

1. 2. 3. 4 Where,

GDP = a0 + a1TD GDP = a0 + a1 ED GDP = a0 + a1 ID GDP = a0 + a1 ED + b2ID

GDP = Gross Domestic Product ID = Internal Debt ED = External Debt TD = Total Debt

a0, a1 and a2 are the parameters.


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3. 5. Working Definition of Terminology


Public Debt :- total public debt includes an external obligation of a public debtor and national government. Internal Debt :- Internal debt is the governments borrowing from domestic banking sector and individual External Debt :- External debt is the governments borrowing from external source through bilateral and multilateral source. Gross Domestics Product (GDP) :- GDP is the measure of the total domestic output at factor price. Debt Servicing :- Debt Servicing refers to the principle payment and interest payment on loan after maturity. Burden of Debt :- Burden of Debt is the sacrifice of the community through a rise in taxation at the time of repayment and for paying the annual interests on the government loans. Debt Trap :- Debt Trap is the situation when new fresh loans are taken to redeem the previously taken loan. Export of goods and services (XGS) :- XGS are the total value of goods and all service ( Including workers remittance) sold to the rest of the world. Import of goods and services (MGS) :- MGS are total value of goods and services purchased from the rest of the world. Gross National Product (GNP) :- GNP is the measure of the total domestic and foreign output claimed by resident of the economy, less the domestic output

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CHAPTER -FOUR
ROLE OF PUBLIC DEBT IN NEPALESE CONTEXT

4. 1. Introduction
Public borrowing plays a vital role in underdeveloped countries like Nepal. It also helps in the financing of economic development through the mobilization of resources. In Nepal, sources of revenue are inadequate and insufficient for the economic development due to low level of income and saving capacity of people. Inspite of these problem expenditure of the government is going on rapidly in order to achieve rapid economic development, mobilize unutilized resources. Government receive revenue through internal sources is not enough in maximization of resources available to the government. Since internal borrowing is very low because of poor tax payable capacity of external borrowing remains alternative sources for development economics.

Underdeveloped countries like Nepal is suffering from vicious circle of poverty. To escape out of such circle, capital formation regarded as a prime mover of development is necessary. But in Nepal, the available stock of capital goods in not sufficient to employ the available labour force on the basis of modern techniques of production. This because it has low rate of saving, investment, income, low living standard due to the low per capita income and poverty, dualistic economy, unutilized natural resources, lower health and education condition of people, deficiency of capital etc, in comparison to developed countries in which development is financed by the automatic forces of capital formation under free market economy. But Nepal has market imperfection. In such market resources are not mobilized properly due to lake of capital. So that public debt is only one solution to fulfill the lack of capital deficiency.

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Fiscal policy must be designed to maintain or achieve the goals of high employment, a reasonable degree of price level stability, balance in the foreign accounts and an acceptable rate of economic growth. Public borrowing is needed for stabilization since full employment and price stability do not come about automatically in a market economy but require public policy guidance. Without it the economy tends to be subjects to unemployment or inflation (Musgrave and Musgrave;1981)

Underdeveloped countries like Nepal have low income whereby it is very difficult for mobilization of resources. Nepal has so vague areas where resources are abundant but those are not monetized. These sectors make the mobilization of financial resources more complex. People have no incentives to save. The government policy to promote development is less effective. Thus the rigorous fiscal policy must be adopted to maximize domestic saving for required investment. The availability of capital funds can be increased through compulsory saving by the help of various fiscal instruments like borrowing, deficit financing and import restriction. There is no doubt public debt is one of the major sources for development financing in developing countries.

Public borrowing is regarded as a prime mover for economic development. Along with this reasonable abundance of natural resources, a spirit of enterprise, a technically trained labour force and dedicated civil servants are the essential requirement for achieving rapid economic development. For this increased capital is needed which seems the fundamental problem of economic development in underdeveloped countries like Nepal due to low label of income and saving capacity of people. In such condition a government can take loan from internal as well as external sources. The scope of domestic borrowing is very limited because of scarce of internal resources. At the same
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time, most of the underdeveloped countries face the shortage of foreign exchange so only external borrowing remains alternative. Thus, there is no doubt that public debt is a useful instrument for economic development of Nepal. Government is bounds to borrow for financing economic development due low level of capital formation, which leads to low level of income and widespread poverty. So to fulfill the lack of capital deficiency public debt plays a prominent role in underdeveloped countries like Nepal either internal or external sources.

4. 2. Public Borrowing and Deficit Financing


Deficit financing is used to mean any public expenditure that is in excess of current public revenue. It has been used for acquiring resources for economic development. When the government cannot raise the enough revenue through taxation and other sources, expenditure meet through public borrowing known is deficit financing. To fulfill such deficit, government can adopt the following solution: Loan from Central Bank Loan from people Issuing paper money External loan , Grants Deficit financing cannot create real resources, which do not exist in the economy. It is only a device that helps to transfer resources to government. The real resources require for economic development must exist in the form of material equipment, labour and skill. Printing money or issuing bank credit cannot create these things. Deficit financing only can put the funds at the disposal of government which can be used for acquiring the real resources provided they are available in the economy.

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Deficit financing is the most useful method of promoting economic development of underdeveloped countries and may be used for the development of economic and social overhead capitals such as construction of roads, railways, power projects, school hospitals etc. By providing socially useful capital, deficit financing is able to break bottlenecks such as lack of capital, technical skill & monetary stability etc. of development and there by increases productivity. Deficit financing as an instrument of economic development, has been given and important place in Nepals development plans. It has been regarded as a means to cover the gap in financial resources for want of adequate internal and external monetary sources in order to fulfill the physical targets in the plans.

Deficit financing is restored mainly to enable the government to obtain necessary resources for plan. The level of outlay local down by government cannot meet only by taxation and other resources. The gap in resources some extent is made up partly by external assistance but when external assistance is not enough to fill the gap, deficit financing has to be undertaken when the targets of production and employment cannot be achieved by the level of expenditure with resources obtained taxation and other sources, additional resources have to found. How much deficit financing must be done is decided by lacking into consideration a number of other important factors and careful limits. A policy of deficit financing is an important and most fruitful instrument for capital formation in UDCs like Nepal. However, deficit financing always s doesnt provide a viable long term solution. The Nepalese experience has clearly established the fact that heavy dose of deficit financing are advisable. Because heavy dose of money infected economy and also creates the problem of monetary stability which make the fruits of development meaningless. It may also lead to inflationary pressure and loss of
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confidence in the currency. Thus, the effects of deficit financing may be distrastrous to economy if its limits are exceeded So, greater stress needs to be placed on the mobilization of domestic resources for financing of development programs in Nepal. In this context, public borrowing can be taken as effective instruments for mobilization of economic resources for development in Nepal.

4. 3. Public Debt and Mobilization of Resources


For economic development of UDCs public borrowing is a means of mobilizing financial resources du e to revenue constraints. No doubt to uplift the economic development public borrowing has significant role. In terms of he orthodox theory of public finance, the current expenditure of government developed to producing capital expenditure the fruits of which subsequently be sold to purchase for fees, should be financed by loan. Mobilization of resources for financing ever increasing development outlay is an extremely difficult problem in development economy. It is in the extent that the role of taxation is emphasized. But there is limit to taxation. If this limit is crossed, taxation poses a serious problem in economic incentives. This leads to the use of public borrowing as a method of resource mobilization. ( Singh;1991)

Domestic saving is the only the reliable source of financing economic development but unfortunately the rate of domestic saving is very low in Nepal because of low income, poverty and most part of income have to pay on tax. In such circumstances, public borrowing should be adopted by government for productive purpose. Public borrowing consists of internal borrowing and external borrowing. Moreover, external borrowing/sources of debt are supplementary in nature as internal saving mobilization is stagnant. The foreign source is the only option to finance development activities as
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internal borrowing capacity of an economy is determined by rate and faith of people upon government etc. therefore, public borrowing seems to be safe and effective measure for mobilizing resources for development. In modern era, in the context of Nepal, public borrowing is applied in the development process of underdeveloped countries is a wider perspective. It is used nit only far meeting the huge wasteful expenditure or for recovering the deficiency of effective demand but is used as an instrument of fiscal policy for mobilizing saving for development purpose and also as an effective instrument of monetary policy for combating inflation created in the process of growth, the ensuring growth with stability.

The objectives of public debt in developing country like Nepal is that the public debt should be used as an instrument to mobilize saving of the people, which would otherwise have gone to ideal or wastefully consumption. public debt should be advocated creating additional capacity and producing capital equipments. Generally government borrows for the creation of infrastructure in the economy. Since it requires huge investment initially which cannot be meet only through revenue collection. The aim of public debt policy should be to help in strengthening the money and capital market which in turn accelerate development and price stability. In most of underdeveloped countries, there is match between revenue and expenditure in one hand and in another investment on infrastructure development is needed. Due to this reason abundant resources are not available through the revenue. In such condition public debt can play major role of raising resource for developing funding. (Basnet2004)

Public borrowing plays a significant role in development process not only by supplying required funds but also establishes regular and acceptable channel for private investment in government securities which not only provides liquidity to invest but also profit by the investment. Public borrowing plays an important role in the development
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of money and capital markets. Government Treasury bills and bonds are the main instruments of financial market which are raised for the purpose of mobilizing resources in right place. So, public borrowing is an affective instruments for mobilization of resources since increase in tax rate is against of public willingness.

4. 4. Fiscal Policy
Nepal being a least developed country has been facing the problems of fund, where level of government revenue is very low because of low tax payable capacity of people. But level of government expenditure in the form of regular and development expenditure is increasing rapidly because of growing concept of globalization, liberalization and privatization. Such concept demands heavy investment for infrastructure development and socio- economic development. Since government revenue is increasing slowly and government expenditure is increasing rapidly, public borrowing becomes important to bridge the fiscal deficit of a country.

Nepal has been incurring fiscal deficit with the evolution of budgetary development; in the first budget of the country in 2008 B.S. revenue was Rs. 30.5 million and total expenditure at Rs. 52.5 million incurring thus the fiscal deficit of Rs. 22 million (Thapa: 2005). This trend has continued uninterruptedly until now. Such condition really forced government for borrowing. Public debt is the result of mismatch between revenue and expenditure over a time frame. A widening saving investment gap, persisting demand for public expenditure accompanied by a sticky revenue ratio have pushing the size of debt in Nepal.

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Nepal has been implementing periodic plan from 1956. Various objectives of economic development are determined in each periodic plan. To fulfill such objectives of economic development there is need of heavy investment to build up socio- economic infrastructure. Since government finance is very low, public debt plays important role to meet such investment.

Hence, it should be noted that dependency on public borrowing is only the temporary solution to bridge the gap between revenue and expenditure. The basic rationale of public debt is to promote domestic growth and long term economic development in the country. Public debt, if prudently and skillfully operated and managed ,can become an important instrument of economic development.

4. 5. Public Borrowing and Economic Development


Underdeveloped countries are suffering from poverty, unemployment, low level of income, low tax payable capacity, economic instability etc. To get rid of this above mentioned problem, economic development is necessary to accelerate economy. Economic development helps to transform the traditional society into modern society. So economic development is the main goal of developing countries but there are resource constraints to achieve such goal. Since other sources of revenue are limited public borrowing becomes useful resource for development.

Most of the underdeveloped countries are conformed to rapid population growth low human capital development, inadequate infrastructural problems and repressive regions. More importantly the inappropriate domestic policies; fiscal policy, monetary policy, liberalization, investment policy and taxation policy pursued by the country have

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contributed to this weak and disappointing overall growth performance. (Regmi; 2004). In such situation, public debt can play vital role for economic development.

Nepal being a least developed country has the potential for development. There is low rate of saving, investment income and low living standard due to the low per capita income and poverty, dualistic economy, unutilized natural resource lower health and education condition of the people, deficiency of capital in underdeveloped countries. Resources gap is a burning problem of such underdeveloped economy due to

deficiency of capital. So that public debt is only one solution to cross the resource constraint. Nepal is facing the deficiency of capital in relation to their production and natural resources due low tax payable capacity of the people causes low income which creates low saving. Nepal is also suffering from vicious circle of poverty. To break vicious circle and uplift a country with a self sustaining growth, a large amount of initial investment is necessary. Thus, the government of such underdeveloped country should emphasize to stimulate and accelerate capital formation.

There is need of heavy investment to fulfill the objectives of economics development. Since it is not possible through the persons, there is need of government finance, such finance is not possible through government also because of poor tax pay able capacity of the people in UDCs like Nepal. At this critical juncture, public debt becomes important source to collect formation small potentiality of saving and low level of tax payable capacity finally hampers economic development, which can be removed by using borrowing and nation becomes prosperous.

In conclusion, public borrowing is regarded as a basic tool for development in developing countries. Without public debt the adequate mobilization of internal
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resources could not have been made in order to accelerate the rate of economic development. Public borrowing proceeds regular channel for investment and also helps in the strengthening the money and capital markets which in turn accelerate development and price stability. As a fiscal measure it is a source of revenue to the government as it channelizes saving from the public to the government. The urgent need in developing countries is not augmentation of effective demand but expansion

of the productive capacity. So borrowing as a method of financing for development is quite suit able as it has less expansionary effect on the money supply than deficit financing.

4. 6. Problem of Borrowing in UDCs


Nepal is facing several problems or constraints in effecting its borrowing programs. The main characteristics of Nepal are low saving, low investment, low level of income, dualistic economy, underdeveloped industrial sector, subsistence forming values and institutions. Illiteracy, technological constraints, unorganized money and capital markets etc. poverty is the growing phenomenon. Due to all these reasons, financial sectors are also underdeveloped. The rural sectors of such developing country appear the largest sector and a substantial volume of saving may originate in this sector. But it is not in reality, since most of the financial and banking institutions are city oriented. So there are problem of rural saving. There is also existence of barter economy in rural areas so that people have no capacity and willingness to save due to poverty and illiteracy. Financial sectors are not well organized for rural saving and investment activities. Mobilization of rural income has not any contributive impact on the economy. Due to lack of appropriate financial and banking sector in rural areas, large part of money expenses in unproductive purpose.
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Values and institutions have also negative impact for the development of physical and financial sectors. Domestic resources are inadequate to meet the financial requirement for economic development. In such condition government is bound to take external loan. But Nepal has less economic and political relation with developed countries for the external borrowing and have less capacity to pay the dues on the other. This is because the most part of the expenses used for productive purpose which decreases the believeness and then further providing of borrowing is less possible. Then factors like political instability, low level of debt servicing capacity, unproductive expense, corruption etc. decrease the intention of donors for providing loan and grants. To conclude, development of finance sectors is essential to strengthen the economy. Money and capital markets are the main indicators of development which can play major role for government borrowing as a short term or long term.

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CHAPTER- FIVE
Trend and Structure of Public Debt in Nepal
5.1. Introduction
Nepal being a least developed country has been facing the problems of funds where the level of government revenue is very low because of low tax payable capacity of people. But the level of government expenditure is increasing rapidly. The government needs heavy investment for infrastructure development and socio-economic development. Since government revenue is not sufficient for such development, public borrowing plays a prominent role to bridge the fiscal deficit of a country to meet such investment. The phenomenon of public debt was originated in Great Britain in 17th century where the city merchants provided grants and loans to the government. It is interrelated with the basic government fiscal flows of taxation and expenditure. If the volume of government expenditure exceeds the volume of tax revenue and other non-tax revenue then a deficit budget exists. Such a deficit budget provides the fundamental precondition for debt creation having once been created debt require interests payments to maintain the debt is to beyond the maturities of existing securities. In Nepal, first experience of foreign aid was that of the US government in 23rd January, 1951 with an agreement of Point four Program. In the first five year plan (1956/571960/61) of Nepal, the development expenditure was fulfilled by foreign loan/ grants. But from second three year plan (1962/63-1964/65), Nepal started to obtain the external debt from 19 63/64 and internal debt from FY 1962/63. For first time FY 1962/63, the government floated securities for mobilizing saving to finance the countrys economic development. Specially, After the enforcement of public debt act 1960, public debt for the first time was issued in Nepal in 1962 through treasury bills amounting to Rs. 7
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million and carried one percent of regulation since 1968/69 and practice was and is still managed with this regulation. The amount of continued increase every year. The main sources of external borrowing of Nepal are bilateral sources i.e. developed countries, mainly America, Japan, Norway, China, India and others and Multilateral sources like IMF, WB and ADB. There are mainly three reasons for raising the public debt or borrowing. To recover the deficit budget. To tackle the emergency period of crisis. To sustain the economic and monetary stability. Nepal has been borrowing heavily from external source mainly to balance her budgetary. It is applied for temporary solutions to bridge the gap between revenue and expenditure. Nepal has been implementing periodic plan from 1956. It is also applied for financing economic development since under developed countries always face the problem of funds which is reflected in a large extent as ever increasing financial resource gap in the government budgetary.

5. 2. Resource gap in Nepalese economy


Resource gap in economy has always been a common phenomenon since the starting of the systematic budgeting system in Nepal. Every individual as well as government needs fund to maintain their expenditure but importance of fund is much essential for government due to the concept of national development. To finance for the development works government must be collect funds through the taxation and other sources of revenue. However government revenue is inadequate to meet the expenditure because of limited sources of revenue generation. To collect needy funds government must be increased in the tax and fees, which is unjustifiable for the point of view of social welfare. On the other side the tax and custom administration is not fair,
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transparent and agile to somewhat extent so that government cannot collect the revenue as it predicts. That is why the annual growth rate of total expenditure and the collected revenue are not increasing in the same pace. Thus, revenue expenditure gap is growing in every fiscal year. The table 5.1 shows the different scenarios of financial resource gap in Nepalese budgetary system.

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Table 5.2.1 Different scenarios of resource gap Fiscal year Total revenue Annua l growt h rate of TR% Total expenditure (TE) Annual growth rate of TE % Scenario Revenue deficit (TRTE) Foreign Grants Fiscal deficit Rs. In Million GDP Reve nue defici t at % of GDP Fis cal defi cit at % of GD P 7.5 6.9 6.4 6.4 8.4 9.2 7.9 7.2 6.1 5.0 5.8 5.3 6.1 5.5 4.8 6.1 5.7 3.8 3.3 3.4 3.9 4.3 4.1 5.7

1985/86 4644.5 9797.1 1986/87 5974.1 28.6 11513.2 1987/88 7350.4 23.0 14105.0 1988/89 7776.9 5.8 18005.0 1989/90 9287.5 19.4 19669.3 1990/91 10729.7 15.5 23549.8 1991/92 13512.7 26.0 26418.2 1992/93 15148.4 12.1 30897.7 1993/94 19580.8 29.3 33597.4 1994/95 24575.2 25.5 39060.0 1995/96 27893.1 13.5 46542.4 1996/97 30373.5 8.9 50723.7 1997/98 32937.9 8.4 56118.3 1998/99 37251.0 13.1 59579.0 1999/00 42893.8 15.1 66272.5 2000/01 48893.6 14.0 79835.1 2001/02 50445.5 3.2 80072.2 2002/03 56229.8 11.5 84006.1 2003/04 62331.0 10.9 89442.6 2004/05 70122.7 12.5 102560.4 2005/06 72282.1 3.1 110889.2 2006/07 87712.1 21.3 133604.6 2007/08 107622.5 2.26 161349.9 Average 14.68 annual growth rate Source: Economic Survey of various years.

17.5 22.5 27.6 9.2 19.7 12.1 17.0 8.7 16.3 19.2 9.0 10.6 6.2 11.2 20.5 0.3 4.9 6.5 14.7 8.1 20.5 20.7 13.7

5152.6 5538.1 6754.6 10228.1 10381.8 12879.9 12905.5 15749.3 14016.6 14484.8 18649.3 20350.2 23180.4 22328.0 23378.7 30941.5 29626.7 27776.3 27111.6 32437.7 38607.1 45892.5 53727.4

1172.9 1285.5 2076.8 1780.6 1975.4 2164.8 1643.8 3793.3 2393.6 3937.1 4825.1 5988.3 5402.6 4336.6 5711.7 6753.4 6686.2 11339.1 11283.4 14391.2 13827.5 15800.8 20320.7

3979.7 4253 4677.8 8447.5 8406.4 10655.1 11261.7 11956.0 11623 10547.7 13824.2 14361.9 17777.8 17991.1 17667.1 24187.8 22940.2 16437.3 15828.2 18046.5 24779.6 30091.7 33406.7

53215.0 61140.0 73170.0 85831.0 99702.0 116127.0 144933 165350.0 191596 209976 239388 269570 289798 330018.0 366251 394052 425454 444052 473545 517993 630300.5 696989 820814

9.7 9.1 9.2 11.9 10.4 11 8.9 9.5 7.3 6.9 7.8 7.5 8.0 6.8 6.4 7.9 7.0 6.3 5.7 6.3 6.1 6.6 6.5 7.9

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In the table, the first scenario shows the revenue deficit, which is difference between revenue and expenditure of government in which we can see the increasing tendency mainly because of increasing volume of total expenditure than revenue. The amount of total expenditure was Rs. 9797.1 million in FY 1985/86,which has gone up to Rs. 161349.9 million in FY 2007/08, whereas total revenue has increased from Rs. 4644.5 million in FY 1985/86 to Rs. 107622.5 in FY 2007/08. This shows public expenditure has dominated to government revenue. Thus the revenue expenditure gap is Rs. 5152.6 million. The expenditure gap is continuously increasing each year and reached up to Rs. 53727.4 million in FY 2007/08. This indicates that the resource gap is serious problem in Nepal. The average annual growth rate of total expenditure during the review period has been 14.68 where as the average annual growth rate of total revenue has been 13.7% . it shows the growth rate of revenue is greater than expenditure but in absolute terms. This indicates the horrible situation of increasing trend of resource gap is coming future. The second scenario shows the fiscal deficit [TE-(TR+Foreign Grants)]. Which is increased from Rs. 3979.7 million in starting year of review period FY 1985/86 to Rs 33406.7 million in last year of review period FY 2007/08. The fiscal deficit is fulfilled by three elements; grants is the most potential sources of foreign currency, which is solid instrument for government to import the capital goods and to pay the interest and principle of external debt. Moreover it can be used on capitalization itself. It does not give burden to the economy. The table also shows the resource gap as percentage of GDP. GDP has been increasing continuously from FY 1985/86 to 2007/08. GDP is the main indicator of the economic development that is why analysis of resource gap as percentage of GDP is more important. We can see the revenue expenditure gap has been decreased initially than after it seems increased for some time and again start decreasing. Clearly, we can say
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that there is fluctuating trend in revenue-expenditure gap. Similarly we can see the fluctuating trend in fiscal deficit and during the review period, it has been 4.1 percent FY 2007/08. Average annual growth rate of revenue expenditure gap as percentage of GDP is 7.9 where as the average annual growth rate of fiscal deficit as percentage of GDP is 5.7. we show the different scenario of Resource Gap in Nepal in the following figure. Figure 5.2.1 Different scenario of Resource Gap in Nepal
Scenario of resource Gap
180000 160000 140000 120000 100000 80000 60000 40000 20000 0 1985/86 1986/87 1987/88 1988/89 1989/90 1990/91 1991/92 1992/93 1993/94 1994/95 1995/96 1996/97 1997/98 1998/99 1999/00 2000/01 2001/02 2002/03 2003/04 2004/05 2005/06 2006/07 2007/08 Fiscal Year Govt. revenue total exp. TR-TE

Source: Economic Survey of Various years Figure 5.2 shows different scenario of resource gap. It shows that both revenue and expenditure are increasing year by year but the increasing rare of expenditure is highere than revenue. So, the gap between revenue and expenditure is very high in every fiscal year.

5. 3. Export Import Gap


Export import gap is one of the main economic problems of Nepalese economy. Nepal being a least developed country exports limited and low quality goods such as garments, low materials, carpets etc. Major exportable goods are raw materials and food
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Rs.in Millon

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grains but import goods are final as well as capital goods. Since the quantum of import is greater than export and import dominates exports and creates imbalance in current account. Heavy and sudden fluctuations in export and import prices create serious problems in balance of payments, national income, investment and overall growth of the country. (Devkota ; 2003). Thus there is no doubt that export import gap created fiscal imbalance in Nepal. The trends of export and import of Nepal is shown on the table 5.2 below. Table 5.3.1 Trend of Export and Import Fiscal year 1985/86 1986/87 1987/88 1988/89 1989/90 1990/91 1991/92 1992/93 1993/94 1994/95 1995/96 1996/97 1997/98 1998/99 1999/00 2000/01 2001/02 2002/03 2003/04 2004/05 2005/06 Export 3078.0 2991.4 4114.6 4195.6 5156.2 7387.5 13706.5 17266.5 19293.4 17639.2 19881.1 22636 27513.5 35676.3 49822.7 55654.1 46944.8 49930.6 53910.7 58705.7 59337.2 Import 9341.2 10905.2 13869.6 16263.7 18324.9 23226.5 31940. 39205.6 51570.8 63679.5 74454.5 93553.5 89002.0 87525.3 108504.9 115867.2 107389.0 124352.1 136277.1 149473.6 153189.4 Export Import gap -6263.2 -7913.8 -9755.0 -12068.4 -13168.7 -15839.0 -18233.5 -21939.1 -32277.4 -46040.3 -54573.4 -70916.9 -61488.5 -51849.0 -58682.2 -60033.1 -60444.2 -74421.5 -82366.4 -90767.9 -93852.2 Rs. In Million Growth rate of E-I gap 26.4 23.3 23.7 9.1 20.3 15.1 20.3 47.1 42.6 18.5 29.9 -13.3 -15.7 13.2 2.3 0.7 23.1 10.7 10.2 3.4

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2006/07 2007/08

44103.3 42369.0

138617.5 160534.4
-

-94514.2 -118165.4
-

7.1 25.0
15.0

Average annual growth rate

Source: Nepal Rastra Bank, Quarterly Economic Bulletain. Table 5.3.1 shows that, the total amount of export was Rs 3078.0 million in 1985/86 which increases to amount Rs.59337.2 million in 2005/06 but in later years, it seems decreasing rate. On the other side the total amount of import was Rs. 9341.2 million in 1985/86 which increases to Rs160534.4 million in FY 2007/08. The rate of growth of import is lower than export but the gap amounted to Rs.118165.4 million in 2007/08, which was Rs.6263.2 million in 1985/86. In export side there is fluctuating trend year by year, but import side, the trend is increasing mostly. This condition states that larger amount of revenue is going to match the export import gap which pushes the economy for further internal and external debt. The figure of export and import shows that Nepal is not in the stage of import liberalization without facilitating national industries.

It can be claimed that either Nepal has to increase export or collect public debt to meet public expenditure. It takes time to promote export and only low quality and quality of goods is exported by Nepal. But it imports high values and final goods. That increases export import gap and the gap is fulfilled by public debt.

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Figure 5.3.1 Trend of Import Export Gap

Export -Import Gap


200000 150000 100000 Rs. in Million 50000 0 1985/86 1986/87 1987/88 1988/89 1989/90 1990/91 1991/92 1992/93 1993/94 1994/95 1995/96 1996/97 1997/98 1998/99 1999/00 2000/01 2001/02 2002/03 2003/04 2004/05 2005/06 2006/07 -50000 -100000 -150000 Fiscal Year 2007/08 Export Import E-I

Source: Nepal Rastra Bank, Quarterly Economic Bulletain. Figure 5.3.1 shows the trends of import export gap. It shows that both export and import are increasing year by year but the growth rate of import is lower than export. The increasing rate of import is higher than export. So the gap between export and import is very high in every fiscal year.

5. 4. Saving Investment Gap


We know that saving is the remaining part of income by deducting consumption. The growth of saving depends upon various factors such as countrys per capita income and its growth rate, population growth rate, interest rate, banking and financial facilities and net factor income. Saving is a part of income by curtailing consumption and investment in the expenditure made for the formation of capital mobilization of saving implies transformation of resource from the hands of surplus units to deficit units. In Nepal, the saving capacity of people is very small due to low level of income as well as having limited opportunities for investment.

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Being an underdeveloped country, Nepal is growing in the development process. For this purpose the government has to push heavy dose of investment. And on the other hand our domestic resources mobilizations are inadequate and insufficient to meet growing needs of investment funds. Then ultimately there has been creating a resource gap which has shown in table below.

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Table 5.4.1 Trend of Saving and Investment Gap Fiscal year Saving (1) Investment (2) S-I Gap (2-1) Rs in Million Annual Growth rate of (S-I) Gap 18.4 36.9 21.4 18.0 24.0 13.7 6.9 -6.4 48.2 47.0 -5.0 4.3 -29.4 47.7 7.5 36.5 24.3 8.5 28.0 55.5 15.7 6.3 18.6

1985/86 5887.0 10599.0 -4712.0 1986/87 7321.0 12898.0 -5577.0 1987/88 7604.0 15237.0 -7633.0 1988/89 10150.0 19415.0 -9265.0 1989/90 8143.0 19076.0 -10933.0 1990/91 11514.0 25074.0 -13560.0 1991/92 16207.0 31619.0 -15412.0 1992/93 23172.0 39653.0 -16481.0 1993/94 29220.0 44644.0 -15424.0 1994/95 32465.0 55321.0 -22856.0 1995/96 34426.0 68017.0 -33591.0 1996/97 39162.0 71084.0 -31922.0 1997/98 41438.0 74728.0 -33290.0 1998/99 46563.0 70061.0 -23498.0 1999/00 57577.0 92272.0 -34695.0 2000/01 62018.0 99301.0 -37283.0 2001/02 51281.0 102174.0 -50893.0 2002/03 54778.0 118020.0 -63241.0 2003/04 62386.0 130993.0 -68607.0 2004/05 66336.0 154162.0 -87826.0 2005/06 58727 97762.2 -39035.2 2006/07 71902 117079.4 -45177.4 2007/08 91716 139745.7 -48029.7 Average Annual growth rate Source: Various Issues of Economic Survey, MOF

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Table 5.4 shows that the amount of saving was Rs. 5887.0 million in 1985/86 which increase to amount Rs. 91716.0 million in 2007/08. And the total amount of

investment was increased from Rs. 10599.0 million to Rs.139745.7 million in FY 1985/86 to 2007/08. From the table, we can see that the rate of saving is in increasing trend up to 2000/01. But in later years, there is fluctuation in saving. Where as investment gap is growing which pushes the economy for further internal and external debt. The growth percentage of saving investment gap is in fluctuating trend. The average annual growth rate of saving investment gap is 18.6%

5. 5. Fiscal situation in Nepal


Revenue mobilization is the major source of the government expenditure. But in our country Nepal, the level of government revenue is very low because of low tax payable capacity of people. But for economic development, government has to in heavy invest on infrastructure. In such situation, the government bound to borrow from internal and external sources to meet the bridge of fiscal deficit. The trend of budgetary deficit of Nepal is shown on the table below

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Table 5.5.1 Ratio of Government Expenditure and Revenue to GDP (at Producer Current Price) (in Percentage) Fiscal year Government expenditure Revenue Deficit Regular Development Total 1990/91 6.3 13.3 19.6 8.9 10.7 1991/92 6.6 11.0 17.6 9.0 8.6 1992/93 6.7 11.3 18.0 8.8 9.2 1993/94 6.2 10.6 16.8 9.8 7.0 1994/95 8.8 9.0 17.8 11.2 6.6 1995/96 8.7 10.5 19.2 11.2 7.5 1996/97 8.6 9.5 18.1 10.8 7.3 1997/98 9.2 9.8 19.0 11.1 7.8 1998/99 9.1 8.3 17.4 10.9 6.5 1999/00 9.1 8.4 17.5 11.3 6.2 2000/01 10.4 7.7 18.1 11.9 7.0 2001/02 10.6 6.8 17.4 10.9 6.5 2002/03 10.6 6.4 17.0 11.4 5.6 2003/04 10.3 6.3 16.6 11.6 5.0 2004/05 10.5 6.9 17.4 11.9 5.5 2005/06 10.2 6.8 17.0 11.1 5.9 2006/07 10.6 7.8 18.4 12.1 6.3 2007/08 11.2 8.5 19.7 13.2 6.5 Source: Various Issues of Economic Survey , MOF/Nepal Development exp. = Capital exp. + Principal repayment exp. From the above table, we can see that the amount of development expenditure is 13.3 percent in FY 1990/91 which decreases to 9.0 percent in FY 1994/95. From 1995/96 there is increasing and decreasing trend and finally reached to 7.8 in FY 2006/07. On the other hand the trend of regular expenditure is continuously increasing from 6.3 percent in FY 1990/91 to 10.6 percentages in FY 2006/07. We have seen that there is fluctuating tendency in development expenditure.
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Revenue mobilization, which was 8.9 percent of GDP in FY 1990/91, increased by 3.2 percent in 2006/07 and reached the level of 12.1 percent of GDP. In the review year, total expenditure was 19.6 percent of GDP in 1990/91 where share of regular and development expenditure were continuously 6.3 and 13.3 percent. In 2006/07 the level of regular expenditure is increased as the percent 10.6 of the GDP where as development expenditure decreased from 13.3 to 7.8 percent of GDP in 19990/91to 2006/07. Deficit as the percent of GDP is decreasing with fluctuating rate from 10.7 percent to 6.3 percent in the review year. Revenue as a percent of GDP is increasing with fluctuating rate from 8.9 percent in 1990/91 to 11.1 percent in 2006/07.

The overall scenario indicated that there is still problem of deficit. Sources of revenue must be mobilized which can contribute to reduce deficit. The overall trend of government expenditure is growing over year it cannot be checked easily so that government should seek other alternative sources of revenue to meet budgetary deficit.

5. 6. Sources of Financing Deficit


Nepalese fiscal system, public debt has been the main source for financing fiscal deficit. Since government expenditure and government revenue is not increasing in the same pace, creates fiscal deficit. Thus, borrowing of public debt becomes an alternative for financing the deficit. The internal and external debt as percentage of fiscal deficit has shown in the following table.

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Table 5.6.1 Public debt as percentage of fiscal deficit Rs. In Million


FY Internal debt (ID) External debt (ED) Total debt Fiscal deficit f Foreign grants Annual growth rate of fiscal deficit 6.9 10.0 82.7 -1.7 26.7 5.7 22 -11 3.3 28.8 9.1 13.9 -3.7 4.7 32.3 -4.2 -6.2 -2.4 19.6 19 18.9 11.0 11.9 ID ED as % of deficit as% of deficit 35.3 38.7 24.2 15.6 25.6 42.7 18.4 13.5 15.6 18 15.9 20.8 19.1 26.1 31.1 28.9 48.6 54 35.4 49.5 47.7 59.4 61.4 28.2 62.8 63.6 81.6 66.3 70.9 58.7 52.8 43.9 65.4 50.5 50.7 44.4 47.7 53.1 50.5 38.9 26 16.4 28.1 28.6 21.3 21.9 26.8 46.5

1985/86 1986/87 1987/88 1988/89 1989/90 1990.91 1991/92 1992/93 1993/94 1994/95 1995/96 1996/97 1997/98 1998/99 1999/00 2000/01 2001/02 2002/03 2003/04 2004/05 2005/06 2006/07 2007/08 Average Annual growth rate

143.4 1644.7 1130.0 1330 2150.0 4552.7 2078.8 1620 1820.8 1900 2200 3000 3400 4710 5500 7000 8000 8880 5607 8938.1 11834.2 17892..3 20496.4 -

2501.1 2705.8 3815.8 5666.4 5959.6 6256.7 6816.9 6920.9 9163.6 7312.3 9463.9 9043.6 11054.4 11852.4 11812.2 12044 7698.7 4546.4 7629 9266 8214.4 10053.5 8979.9 -

3904.5 4350.5 4945.8 6996.4 8109.6 10809.4 8895.7 8540.9 10984.4 9212.3 11663.9 12043.6 14454.4 16562.4 17312.2 19044 15698.7 13426.4 13236.0 18204.1 20048.6 27945.8 29476.3 -

3979.7 4253 4677.8 8547.5 8406.4 10655.1 11261.7 11950 11623 10547.7 13824.2 14361.9 17777.8 17991.4 17667.0 24188.1 22940.6 16437.1 15828.2 18046.5 24779.6 30091.7 33406.7 -

1172.9 1285.1 2076.8 1780.6 1975.4 2164,8 1643.8 3793.3 2393.6 3937.1 4825.1 3988.3 5402.6 4336.6 5711.7 6753.4 6686.2 11339.1 11283.4 14391.2 13827.5 15800.8 20320.7 -

Source: Economic Survey of different years.

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The table shows the increasing trend of public debt. In 1985/86, public debt is Rs.3969.7 million which has increased to Rs. 29476.3 million in FY 2007/08. Similarly, both internal and external debt are increased from Rs143.4 and Rs 2501.1 million in FY 1985/86 to Rs 20496.4 and Rs 8979.9 million in FY 2007/08 respectively. The average annual growth rate as percentage of total debt to fiscal deficit is 11.9 percentage.

The internal debt has occupied 35.3 percent of deficit where as external debt has occupied 62.8 percent in FY 1985/86 and in FY 2007/08 the internal debt has occupied 39.0 percent where as external debt has occupied 21.1 percent. These all indicates that the government growing reliance on external loan for meeting the ever increasing fiscal deficit.

5. 7. Growth trend of Government borrowing


Government borrowing is the main source for financing fiscal deficit in Nepalese fiscal system. Government borrowing is increasing annually in the context of Nepals budgetary system. Even after the restoration of multiparty system, for the attainment of economic development. Government has to invest more, so that government expenditure is increasing. The reliance on taxation is not possible in view of the large amount of financial resource required for government expenditure due lack of fair and transparent administration. So that Nepal is facing large and growing financial resource gap in the government budgetary system. In their context, the government borrowing both external and internal need for supplement this resource gap. The government has to borrow large amount of loans to meet the fiscal deficit. Table 5.4. reflects the trends of debt and grants as well as its annual growth rate in Nepal.

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Table 5.7.1 Growth Trend of Government Borrowing as Percentage of GDP Rs In Million


Fiscal year Total debt Internal debt External GDP debt % share of external debt to total debt 64.0 62.2 77.2 81.0 68.4 57.9 76.6 81.0 83.4 79.4 81.1 75.1 76.5 71.6 68.2 63.2 49.0 33.9 57.6 50.9 40.9 35.9 30.4 60.6 % share of internal debt to total debt 35.9 37.8 22.8 19.0 24.7 42.1 23.4 19.0 16.6 20.6 18.9 24.9 23.5 28.4 31.8 36.8 51.0 66.1 42.4 49.1 59.0 64.1 69.5 35.9 Internal debt as % of GDP External Total Debt as debt % of as % GDP of GDP 5.98 5.39 4.71 4.19 4.78 3.48 4.70 4.19 4.78 3.48 3.95 3.35 3.81 3.59 3.23 3.06 1.81 1.02 1.61 1.79 1.30 1.44 1.1 3.2 7.35 7.12 6.76 8.15 8.74 9.31 6.14 5.17 5.73 4.39 4.87 4.47 4.99 5.02 4.73 4.83 3.69 3.02 2.80 3.51 3.18 4.01 3.59 5.1

1985/86 1986/87 1987/88 1988/89 1989/90 1990/91 1991/92 1992/93 1993/94 1994/95 1995/96 1996/97 1997/98 1998/99 1999/00 2000/01 2001/02 2002/03 2003/04 2004/05 2005/06 2006/07 2007/08 Average annual growth rate

3904.5 4350.5 4945.8 6996.4 8109.6 10809.4 8895.7 8540.9 10983.6 9212.3 11663.9 12043.6 14454.5 16562.4 17312.2 19044.0 15698.6 13426.4 13236.8 18204.2 20048.6 27945.8 29476.3 -

1403.4 1644.7 1130.0 1330.0 2150.0 4552.7 2078.8 1620.0 1820.0 1900.0 2200.0 3000.0 3400.0 4710.0 5500.0 7000.0 8000.0 8880.0 5607.8 8938.1 11834.2 17892.3 20496.4 -

2501.1 2705.8 3815.8 5666.4 5959.6 6256.7 6816.9 6920.0 9163.3 7312.3 9463.9 9043.6 11054.5 11852.4 11812.2 12044.0 7698.6 4546.4 7629.0 9266.1 8214.4 10053.5 8979.9 -

53215 61140 73170 85831 99702 116127 144933 165350 191596 209976 239388 269570 289798 330018 366251 394052 425454 444052 473545 517993 630300 696989 820814 -

2.63 2.69 1.54 1.54 2.15 3.90 1.43 0.98 0.95 0.90 0.92 1.11 1.17 1.43 1.50 1.78 1.88 2.00 1.18 1.73 1.88 2.57 2.49 1.75

Source: Budget speeches and economic survey (various issues).IMF

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Table 5.7.1 shows that the government borrowing and annual growth rate from the period 1985/86 to 2007/08. This shows both internal and external debt are in increasing trend. The average annual growth rate as percentage share of internal debt and external debt to total debt is 35.9 and 65.2 respectively. The above table shows that the total debt has been increased from 3904.5million in FY 1985/86 to Rs. 29476.3 million in FY 2007/08. The share of internal debt and external debt as percentage of GDP is 2.63 percent and 5.98 percent respectively in FY 1985/86. This has been decreased to 2.49 percent and 1.1 percent respectively in FY 2007/08. The contribution of external debt to total debt has been decreased from 30.4 in last year to 30.4 percent in the study period. This decreasing trend of external debt is caused due to the political instability, insurgency and terrorism. Figure 5.7.1 Growth trend of Government Borrowing
Growth Trend of Goverment Borowing
35000 30000 Rs. in Million 25000 20000 15000 10000 5000 0

Fiscal Year Internal debt External debt Total debt

Source: Budget speeches and economic survey (various issues).IMF

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Figure 5.7.1 shows the percentage shared of external debt in total debt occupies a greater share than internal debt. Government debt basically depends upon the external debt so share of external debt in total debt is increasing in each fiscal year.

5. 8. Structure of Net Internal debt in Nepal


Nepal has started borrowing since the year 1961. It has been borrowing the internal debt to bridge the resource gap on the budgetary deficit and mobilizing the financial resource for development from various sources such as Treasury Bills, Development bond, National saving certificates and special bonds. Now a days government is also receiving internal borrowing from citizen Saving Certificates. The structure and trend of internal outstanding debt is shown in the table (5.4) below.
Table 5.8.1 Ownership pattern of net internal debt Total outstanding internal debt 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 Treasury bills Development bonds 31.8 33.2 39.9 39.4 36.7 26.2 22.0 20.1 15.4 12.8 10.7 8.47 8.5 7.8 7.84 9.92 15.1 Rs. In Percentage Special bonds National saving certificate 20.8 4.45 21.5 6.97 18.7 5.9 17.0 34.3 19.7 31.1 17.4 44.9 19.5 43.3 19.2 43.2 8.5 48.9 8.9 48.2 21.5 46.8 24.3 44.6 25.7 41.7 21.2 36.8 21.2 32.2 20.7 23.3 15.8 12.6

Fiscal year 1985/86 1986/87 1987/88 1988/89 1989/90 1990/91 1991/92 1992/93 1993/94 1994/95 1995/96 1996/97 1997/98 1998/99 1999/00 2000/01 2001/02

42.8 38.2 35.1 9.0 12.4 11.2 14.9 17.2 17.0 19.9 20.8 22.5 23.9 35.8 38.6 45.9 56.3

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Innovation, Education & Empowerment 2002/03 100 58.3 2003/04 100 58.1 2004/05 100 59.6 2005/06 100 67.6 2006/07 100 72 2007/08 100 78.7 Source: Various Issues of Economic Survey 19.1 20.6 23.2 19.3 18.7 18.7 11.7 10.6 7.6 4.1 1.93 1.4

WikiAstha.com 10.9 10.5 9.4 8.4 7.0 1.1

The above table shows the pattern of net outstanding debt and its variation into treasury bills, development bonds, national saving certificates and special bonds. In the table the percentage share of treasury bills, development bonds, National saving certificates and Special bonds to total net outstanding debt is 42.8%, 31.8%, 20.8% and 4.45% respectively in FY 1985/86. From the above table, we have seen the increasing trend of treasury bills and declining trend of both Development bonds and National Saving Certificate in total outstanding internal debt. Similarly, there is fluctuating trend in special bond. In FY 2007/08, the percentage share of Treasury bills, Development Bond, National Saving Certificates and Special Bonds are 78.7, 18.7, 1.4. 1.

5. 9. Pattern of External Debt in Nepal


Needs of external borrowing is growing due to the revenue deficiency. The foreign assistance grants and loans are the major source of foreign currency for Nepal. Since internal debt is not sufficient to government for development activities external debt is the most essential source of revenue to the government. Nepal has started to borrow foreign loan since 1964/65. It has continued need to borrow from external sources to bridge resource gap and quantum of external borrowing is increasing year by year. The external donors are attracted to provide financial assistance for the socio- economic development of Nepal. Nepal has borrowed external loan through the bilateral and multilateral sources. Bilateral loans are loans from government and their agencies, loans from autonomous bodies and direct loans from official export credit agencies.
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Multilateral loans are loans and credits from multilateral agencies such as World Bank, International Monetary Fund, Regional Development Banks and Multilateral and intergovernmental agencies. The pattern of bilateral and multilateral debt is shown in the following table.

Table 5.9.1 Pattern of External Debt in Terms of Disbursement by Major Sources Rs. In Million
FY Bilater al source s 498.9 299.7 462.5 507.8 1000.6 1602.8 2389.8 1307.6 582.9 717.3 460.0 8507 1314.5 584 757.9 586.7 87 657.2 66 Multilater al sources Total % share external of debt bilatera l sources 2370.9 21.0 2236.1 12.7 3094.3 14.9 4188.7 12.1 4628.3 21.6 4360 36.8 6269.4 38.1 5961.7 21.9 9163.6 6.4 7312.3 9.8 9463.9 4.9 9043.6 9.4 11054. 11.9 5 11852. 4.9 4 11812. 6.4 2 12044 4.9 7698.6 1.1 4546.4 14.5 7629 0.9 % share of multilate ral sources 79.0 87.3 85.1 87.9 78.4 63.2 61.9 78.1 93.6 90.2 95.1 90.6 88.1 95.1 93.6 95.1 98.9 85.5 99.1 GDP Bilatera l sources as % of GDP 0.94 0.49 0.63 0.59 1.00 1.38 1.65 0.79 0.3 0.34 0.19 0.32 0.45 0.18 0.21 0.15 0.02 0.15 0.01 Multilatera l sources as % of GDP 3.52 3.37 3.60 4.29 3.64 2.37 2.68 2.81 4.48 3.14 3.76 3.04 3.36 3.41 3.02 2.91 1.79 0.88 1.6 Externa l debt as % of GDP 4.46 3.66 4.23 4.88 4.64 3.75 4.33 3.61 4.47 3.48 3.95 3.35 3.81 3.59 3.23 3.06 1.81 1.02 1.61

1985/86 1986/87 1987/88 1988/89 1989/90 1990/91 1991/92 1992/93 1993/94 1994/95 1995/96 1996/97 1997/98 1998/99 1999.00 2000/01 2001/02 2002/03 2003/04

1872.0 2062.2 2631.8 3680.9 3627.7 2757.2 3879.6 4654.1 8580.7 6595 9003.9 8192.9 9740 11268.4 11054.3 11457.3 7611.6 3889.2 7563

53215 61140 73170 85831 99702 116127 144933 165350 191596 209976 239388 269570 289798 330018 366251 394052 425454 444052 473545

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Innovation, Education & Empowerment 2004/05 2005/06 2006/07 2007/08 Average annual growth Rate 126.5 9139.6 40.6 8173.7 9004.6 1048.9 6321.1 8347.77 9266.1 8214.3 10053. 5 8979.9 1.4 0.5 89.6 7.0 15.7 98.6 99.5 10.4 92.9 84.3 517993 630300.5 696989 820814 0.02 0.01 1.29 0.07 0.48

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Source: Various Issues of Economic Survey The above table shows that the pattern of external debt in terms of disbursement by major sources. It is observed that bilateral loan is in decreasing trend and multilateral loan in increasing trend and it also reflects that total external debt has been increasing in each year. The total external loan was Rs. 2370.9 million in 1985/86 which has increased to Rs.12044 million in F Y 2000/01 but in later years, it going on decreasing and reached up to Rs. 8979.9 million under the study period in FY 200/08. In the table we can see that the multilateral debt has dominated the bilateral debt. In FY1985/86 Rs. 498.9 million from bilateral source and Rs. 1872.0 million from multilateral source where the share is 21.0 and 79.0 percent respectively. In FY 2007/08, the bilateral loan has been increasing to Rs. 6321.1 million but it has been decreased than previous year and multilateral loan has also been increasing to Rs. 8347.7 million where the share is 7.0 percent and 92.9 percent respectively. The average annual growth rate as percentage share of bilateral and multilateral sources is 13.6 percent and 89.0 percent respectively.

The ratio of bilateral source to GDP is 0.94 percent in FY 1985/86 , which has increased to 0.07 percent in FY 2007/08. Similarly, the multilateral source to GDP ratio is 3.52 percent in FY 1985/86 which is also increased to 1.0 percent in FY 2007/08. There is high fluctuation in the both sources of external debt to GDP ratio. The average
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annual growth rate of bilateral sources as percentage of GDP ratio is 0.48 percent and the average annual growth rate of multilateral sources as percentage of GDP ratio is 2.6 percent. Hence the annual average growth rate of total external debt as percentage of GDP is 3.1 percent.

Figure 5.9.1 Pattern of External Debt


Pattern of External Debt
14000 12000 Rs.in Million 10000 8000 6000 4000 2000 0

Bilateral source

Fiscal Year Multiateral sources

Total external debt

Source: Various Issues of Economic Survey

Figure 5.9 shows the trends of bilateral and multilateral sources of external debt where the portion of multilateral sources is very higher than bilateral sources which shows that multilateral sources is more important.

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5. 10. Net outstanding public debt in Nepal


The total amount of internal as well as external debt after deducting repayment of principle and interest is called net outstanding public debt. As the revenue surplus has not been adequate to meet the development expenditure, the deficit budget has remained the prime feature of Nepalese fiscal policy. So, to cover deficit, foreign and internal loan have been mobilized by the government to meet the ever increasing financial resource gap. Therefore the value of total loan has been increasing in each Fiscal Year. The net outstanding debt has been shown in the following table.

Table No. 5.10.1 Net outstanding public debt to GDP ratio FY Outstanding Outstanding Total GDP internal external outstanding debt debt debt Rs. In Million Internal External debt debt as as% of % of GDP GDP Total public debt as %of GDP 30.7 36.6 40.8 47.6 49.8 63.9 63.3 66.9 66.5 68.4 66.9 61.7 68.0

1985/86 1986/87 1987/88 1988/89 1989/90 1990/91 1991/92 1992/93 1993/94 1994/95 1995/96 1996/97 1997/98

7190.2 8997.4 1636.0 12887.9 14673.1 20855.9 23234.9 25456.0 30631.2 32057.9 34241.8 35890.8 38406.7

10330.2 15171.9 20826.0 29216.9 36800.9 59505.3 70923.9 87420.8 101966.8 113000.9 128044.4 132086.8 161208

16361.8 22362.1 29823.4 49688.9 49688.9 74178.4 91779.8 110655.7 127422.9 143632.1 160102.2 166328.7 197098.9

53215 61140 73170 85831 99702 116127 144933 165350 191596 209976 239388 269570 289798

13.51 14.71 15.90 15.01 14.71 18.0 16.0 15.4 16.0 15.3 14.3 13.3 13.4

19.4 24.8 28.5 34.0 36.0 16.51.2 48.9 52.9 53.2 53.8 53.5 49.0 55.6

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1998/99 1999/00 2000/01 2001/02 2002/03 2003/04 2004/05 2005/06 2006/07 2007/08
Average Annual Growth Rate

49669.6 54357.0 60043.7 73621.0 79566.8 84645.3 86133.7 87564.2 93031.9 116039.5 -

169465.7 190691.2 200404.4 220125.6 223433.2 232779.3 219641.9 233968.6 216200.7 249965.4 -

207872.6 240360.8 256907.6 280169.3 297053.9 317424.6 305775.6 321532.8 309232.6 366004.9 -

30018 366251 394052 425454 444052 473545 517993 6303005 696989


820814 -

15.0 14.9 15.2 18.15 18.27 17.9 16.6 13.9 13.3 13.7 14.5

51.4 52.1 50.9 51.7 50.3 49.2 42.4 37.1 31.0 44.7 42.0

63.0 65.6 64.9 65.9 66.9 67.0 59.0 51.0 44.4 58.1 58.1

Source: Economic Survey 2006/07, MOF. The above table 5.10 shows that the net outstanding public debt from 1985/86.. Both net outstanding internal and external public debt are monotonically increasing in each fiscal year. In FY 1985/86 internal and external outstanding debt are RS 7190.2 million and Rs. 10330.2 million respectively, which reached to Rs. 116039.5 million and Rs 249965.4 million in FY 2007 million respectively. The average annual growth rates of internal and external debt as percentage of GDP are 14.5 and 42.0 percent respectively. Similarly average annual growth rate of total public debt as percentage of GDP is 58.1 percent. Thus, overly, the net outstanding debt share of external source is larger than internal sources. Hence, this shows that external debt dependency is increasing rapidly in each fiscal year.

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Figure 5.10.1 Net outstanding public debt in Nepal


Net outdtanding Public debt in Nepal
400000 350000 300000 Rs.in million 250000 200000 150000 100000 50000 0

Fiscal Year Outstanding Internal debt Outstanding External Debt Total outstanding debt

Source: Economic Survey 2006/07, MOF. Figure 5.10.1shows that the pattern of net outstanding debt which shows both internal and external outstanding debt is increasing in every fiscal year. But the trend of increasing rate of external outstanding debt is higher than internal outstanding debt

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CHAPTER - SIX Burden of Public Debt 6.1.


Introduction
The burden of public debt refers to cost or sacrifice on the community through a rise in taxation necessited at the time of repayment and for paying the annual interests on the govt. loans. In other words, it refers every government is bound to repay the public borrowing whether internally or externally with interest, monetary or real and it may tend to fall either on the present or sometimes on the future generation. When debt is incurred by government the principle and interest charge are raised through the taxation. And when tax is raised from people the primary and secondary burden of public debt emerges. The primary or financial burden means the loss of income of people that arise an account of taxation for meeting t he servicing cost of the debt. The adverse effect of taxation upon the ability and willingness to save can be taken as secondary or real burden. Such burdens depend upon the use of debt and

The classical view under the self liquidating or pay as you-use approach, maintains that any loan which is incurred for a purpose that does not yield any direct monetary return a burden impose to the society. It is for the reason that additional taxation is needed to meet interest cost and to repay the principal. The conventional view maintains that public borrowing diverts for saving public use and thereby starves the private sector.

The Keynesian approach observed that public borrowing for the purpose of generating effective demand is no real burden because it would activate idle savings in the private sector and generate income, employment and output. Domar has gave a step further and
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integrated the Keynesian view with the economic growth. He argued that public debt is a burden only when the rate of growth of the economy falls behind the rate of income in interest cost The total burden of public debt can be divided into two parts. Internal burden of public debt. External burden of public debt. The burden of internal public debt means that the large part of debt is held internally. According to Dalton (1949) takes internal public debt burden as not much significant as the payment of principle amount and its interest involves taxation. It is merely transfer of purchasing power from one person to another or money does not flow out to the national money does not flow out to the national money market. Similarly Lerner (1946) points out, the Internal debt may not have any direct money burden on a community as a whole, since the payment of interest and increased taxation to meet the burden of debt involved transfer the purchasing power from one group of person to another, to the extent the creditors and tax payer the same, there may not be any net burden all in the community. But to the extent of the creditor and tax payers belong to different income groups, the changes in the distribution of income among different sector of the community may take place

In case of external debt, it is paid not in monetary terms but in real terms, in terms of goods and services, which are exported to the creditors country for the settlement of the debt. This process will have to continue during the whole period of loan because the borrowed country has to pay interest charges. But if external loans are used for increasing the productive capacity of the country the debt repayment may not be a serious burden. This debt or country may pay of the debt and interest without any difficulty because of increased capacity of export oriented industries. If the borrowed
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fund spent otherwise and the government would have to borrow again to meet the requirement of development funds and for meeting the charge of debt servicing as well as then it is quite possible that this process lead to bankruptcy of the government or debt crisis in the future.

In case of shifted the burden of public debt to the future generation, there is always debate among the economics. Some of the economist have viewed, if the present generations reduce their saving in order to meet the debt finance and leave a smaller amount of capital resource for future, this will reduce the productive capacity of the coming generation and they will accordingly lose. In this way, burden of debt may pass on to the future generation. But some economists have challenged the above version and opposite opinion on the subject of burden of public debt. They submit that there is no shift of the basic burden to the future generation because the state posterity, which pays the additional taxes, will be benefited from the repayment of the debt.

Richard Musgrave viewed that burden of debt can be shifted to future generation. According to Lekhi (2001) ,"the burden of public debt refers to the sacrifice and effect on the commodity through rise in taxation at the time of repayment for paying the annual interest on government loans, A government that chooses borrowing rather than taxation to pay for a part of its expenditures does not escape to a world of easy, choices. (J.Nevin) According to Bowen, Davids and Kepf ,the present generation choose not to cut down its consumption pattern at all but finance the entire debt through reduce savings. The total burden of public outlay is the reduction in the life time consumption of each generation of taxpayers.

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Gunanidhi Sharma, observed in his article, According to him, Nepal is facing a paradoxical situation in that she can neither promote her economy without aid nor has she been able to avoid the risk of becoming the victim of aid intoxication. Meanwhile, aid for long period has created a separate social group namely the rental class. Owing to heavy reliance on external assistance in the form of borrowing on public account, Nepals external public indebtness should be accompanied by on increased in debt servicing capacity so that there may be under strain in the balance of payment owing to out flow of funds through debt services. (Khanal 2000)

Thus, through the above discussion, it is very difficult to conclude a particular view opinion in the issue. Therefore, the position of shifting the burden of public debt to the future generation has remained an unsettled riddle so far. Here, this chapter has attempted to analyze the issues related to public debt servicing and macro economic imbalances, burden of public debt to GDP and debt servicing problem in Nepal.

6. 2. Debt Servicing Issues in Nepal


The payment of interest as well as principal of public debt is known as debt servicing in economics and finance. It is an issue of debt in Nepalese economic problems due to the heavy dependency on foreign loan, share of foreign loan is in rapidly increasing trends, which will increase financial and real burden for future generation. To pay the existing debt we are taking loan from internal and external . The amount of external loan is relatively higher than that of internal loan. As such, the repayment amount of internal loan is found to be greater than external loan. Internal loan mobilization is relatively expensive than external loan. Hence, it becomes cheaper when our currency is devaluated. The public debt of Nepal is still less burdens some as
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foreign loans are available at the subsidized rate. Table 6.1 shows the trend of internal and external debt servicing and growth rate of total, internal, and external debt servicing below.

Table 6.2.1 Trend of debt servicing and GDP Rs. In Million


Fiscal year Internal External % of % of GDP Total debt debt IDS EDS debt servicing servicing servicing toTDS toTDS Total debt servicing as % of GDP 53215.0 1.9 61140 2.0 73170 2.0 85831 2.0 99702 2.3 116127 2.1 144933 2.6 165350 2.8 191596 2.6 20976 2.9 239388 2.8 269570 2.8 289798 2.7 330018 2.6 366251 2.7 394052 2.6 425454 2.9 444052 3.6 473545 3.7 517993 3.8 630300 3.3 696989 3.3 820814 3.0 Internal debt servicing as % of GDP 1.4 1.2 1.2 1.2 1.2 1.1 1.5 1.5 1.3 1.5 1.4 1.5 1.2 1.2 1.3 1.1 1.3 2.0 2.0 2.3 1.8 1.9 1.8 External debt servicing as % of GDP 0.5 0.8 0.8 0.8 1.1 0.9 1.1 1.3 1.3 1.4 1.4 1.2 1.4 1.5 1.6 1.5 1.7 1.7 1.6 1.5 1.4 1.4 1.2

1985/86 1986/87 1987/88 1988/89 1989/90 1990/91 1991/92 1992/93 1993/94 1994/95 1995/96 1996/97 1997/98 1998/99 1999/00 2000/01 2001/02 2002/03 2003/04 2004/05 2005/06 2006/07 2007/08

1019.3 1196.6 1441.6 1720.6 9970.2 2407.4 3797.1 4560.5 4855.1 6083.3 6715.5 7527.2 7682.8 8723.0 10032.8 10355.4 12205.2 16181.3 17338.7 21897.4 21348.2 22916.3 24905.1

733.6 709.6 905.5 1019.4 1155.6 1320.9 2132.2 2428.6 2366.4 3098.6 3411.2 4177.8 3481.6 3977.5 4711.4 4187.0 5637,7 8662.1 9431.2 13798.1 12238.2 13321.8 14891.2

258.7 487.0 591.0 701.3 1123.6 1086.5 1664.9 2131.9 2488.7 2984.7 3304.3 3349.4 4201.2 4745.5 5321.4 6201.4 6567.5 7519.2 7907.5 8099.3 9110.0 9594.5 10014.7

72.0 59.3 60.5 59.2 50.7 54.87 56.15 53.25 58.74 50.94 50.80 55.50 45.32 45.60 46.96 40.30 46.19 53.53 54.39 54.39 57.32 58.13 59.79

28.0 40.7 39.5 40.8 49.3 45.13 43.85 46.75 51.26 49.06 49.20 44.50 54.68 54.40 53.04 49.70 53.81 46.47 45.60 45.60 42.67 41.86 40.2

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Source: Various Budget Speeches and Economic Survey 2005/03.36 MOF/NG/Nepal. On table 6.2.1shows that the total debt servicing is increasing rapidly. In FY 1985/86 , total debt servicing was Rs 1019.6 million which has increased to Rs. 24905.1 million in FY 2007/08. The growth rate of internal debt servicing is larger than external debt servicing. From the table, we can see that the share of internal debt servicing in total debt servicing has been greater than of external debt servicing up to FY 1996/97. Than after it seems decreasing up to 2002/03 and again start increasing and reached to 59.8% in FY 2007/08 from 72% in FY 1985/86. In FY 1985/86, the average annual growth rate of internal debt servicing as percentage of GDP is 1.4% and external debt servicing as percentage of GDP is 1.2% and total debt servicing as percentage of GDP is 2.8 % in FY 2007/08. This shows that the burden of internal debt servicing is increasing rapidly than burden of external debt servicing. Thus to remove this problem of burden proper debt management is necessary Figure 6.2.1 Pattern of internal and external debt servicing

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Pattern of Internal and External debt servicing 30000 25000 20000 15000 10000 5000 0

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Rs. in million

Fiscal Year Total debt servicing internal debt servicing External debt servicing

Source: Various Budget Speeches and Economic Survey 2005/03.36 MOF/NG/Nepal. Figure 6.2.1 shows the internal debt and total debt servicing in Nepal. This shows both internal and external debt servicing are increasing in each fiscal year.

Table 6.2.2 Trend of share of principal and interest servicing to total debt servicing Rs. In Million Fiscal year Total debt Principal servicing Interest servicing servicing Internal External Internal External 1985/86 1019.3 182.3 160.6 551.3 125.2 1986/87 1196.6 100.0 250.6 609.6 236.4 1987/88 1441.6 100.0 297.5 750.6 293.5 1988/89 1720.6 145.5 388.6 873.9 312.7 1989/90 2279.2 100.5 701.8 1055.1 421.8 1990/91 2407.4 150.0 589.0 1170.9 497.5 1991/92 3797.1 264.8 942.2 1867.4 722.7
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1992/93 4560.5 345.0 1252.9 2083.6 1993/94 4855.5 430.0 1468.2 1936.4 1994/95 6083.3 825.0 1828.2 2273.6 1995/96 6715.5 859.8 1987.7 2551.3 1996/97 7527.2 1350.9 2102.4 2826.9 1997/98 7682.8 1151.0 2780.2 2330.6 1998/99 8723.0 1446.2 3196.5 2531.3 1999/00 10032.8 1531.6 33681.0 3179.8 2000/01 10355.4 1190.0 4500.6 2997.0 2001/02 12205.2 1683.6 4751.4 3954.1 2002/03 16181.3 4062.0 5497.5 4610.1 2003/04 17338.7 5029.1 5765.8 4402.1 2004/05 21897.4 7580.1 5953.2 6217.3 2005/06 20348.2 7277.3 6987.5 4910.8 22916.3 2006/07 9213.5 7538.1 6164.0 24905.1 2007/08 8517.5 7869.1 6373.6 Source: Various Issues of Economic Survey, MOF, NG/Nepal.

879.0 1020.5 1156.5 1316.6 1247.0 1421.0 1549.0 1640.3 1700.8 1816.1 2021.7 2141.8 2146.7 2163.9 2055.7 2145.3

The above table shows the larger amount of government expenditure is going for interest and principle payment. The interest rate of internal loan is higher than external loan so that most part of debt servicing is expenses for internal interest servicing. Similarly we can see that the internal principal servicing grew up with the amount Rs. 182.3 million where as external was Rs.160.6 million in FY 1985/86. Which reached to Rs.8517.5 million and Rs. 7869.1 million in FY 2007/08. So, it is cleared that principal servicing for external loan is growing rapidly as compare to internal loan servicing up to FY 2003/04 but in later years the principle servicing for external loan is decreasing as compare to internal loan servicing. The table shows that interest servicing for internal loan was Rs. 551.3 million and external loan was Rs.125.2 million in 1985/86 which reached to Rs. 6373.6 million and Rs. 2145.3 million in 2007/08 respectively.

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In conclusion we can say that principal debt servicing and interest payment for internal loan is growing rapidly than external loan under the review period.

6. 3. Share of Internal and External Debt Servicing in Regular Expenditure and Total Revenue
Both internal and external debt servicing to total revenue is an important indicator for estimating burden of internal and external debt charge. Moreover, the process of debt servicing has burden on the regular expenditure. Here, the table shows the internal and external debt servicing and their percentage share in regular expenditure and total revenue. Table 6.3.1 Share of Internal and External Debt Servicing in total revenue , regular expenditure Rs In Million
Fiscal year Total revenue Regular expenditure (RE) External debt servicing 258.7 487.0 591.0 701.3 1123.6 1086.5 1664.9 2131.9 2488.7 2984.7 3304.3 3349.4 4201.2 4745.5 Internal debt servicing 733.6 709.6 905.5 1019.4 1155.6 IDS as IDS as EDS EDS % of % of RE as % as % TR of TR of RE

1985/86 1986/87 1987/88 1988/89 1989/90 1990/91 1991/92 1992/93 1993/94 1994/95 1995/96 1996/97 1997/98 1998/99

4644.5 5975.1 7350.4 7776.9 9287.5 10729.3 13512.7 15148.4 19580.9 24605.1 27893.1 30373.5 32937.9 37251.3

3584.0 4123.6 462.1 5676.5 6672.2 7574.1 9905.42 11484.1 12409.2 19267.1 21561.9 24181.1 27174.4 31944.2

1320.9 2132.2 2428.6 2366.4 3098.6 3411.2 4177.8 3481.6 3977.5

15.8 11.9 12.3 13.1 12.4 12.3 15.8 16.01 15.2 12.6 12.2 13.8 10.6 10.7

20.5 17.2 19.4 18.1 17.3 17.4 21.5 21.1 19.1 16.1 15.8 17.3 12.8 12.8

5.5 8.1 8.0 9.0 12.0 10.1 12.3 14.0 12.7 15.8 11.8 11.0 12.7 12.7

8.0 1.8 8.0 11.8 12.6 12.4 16.8 18.6 20.1 15.5 15.3 13.9 15.5 15.3

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1999/00 2000/01 2001/02 2002/03 2003/04 2004/05 2005/06 2006/07 2007/08


Average annual growth rate

42893.9 48893.9 50445.6 56229.7 62331.0 70122.7 72282.1 87712.1 107622.5


-

35579.1 45837.3 48863.9 52090.5 55552.1 61686.4 67017.8 77122.4 91446.9


-

4711.4 4187.0 5637.7 8662.1 9431.2 13797.4 12188.1


13321.8 14891.2 -

11.0 8.6 11.2 15.4 15.3 19.6 16.8 15.8 13.8


13.5

13.7 9.8 11.6 15.8 16.9 19.6 16.8 15.1 13.8


15.6

12.4 12.6 13.0 13.3 12.6 11.5 12.6 10.9 9.3


11.4

15.4 14.5 13.5 13.7 17.3 13.1 8.2 12.4 10.9


13.2

Source: Various Budget speeches and economic survey MOF.


.The

table 6.3.1 shows the volume of regular expenditure, total revenue, and internal

debt servicing& external debt servicing. It also shows the share of TR, RE as percentage of internal & external debt servicing. In FY 1985/86, the magnitude of total revenue, regular expenditure, and internal & external debt servicing was Rs.4644.5, 3584.0, 733.6 and 258.7 which has increased to 107622.5,91446.9,14891.2 & 10014.7 million in FY 2007/08 respectively. The above table also shows that the trend of debt servicing as percentage of total revenue , regular expenditure has been decreasing and fluctuating. The internal debt servicing as percentage of total revenue(TR) was 15.8 percent in FY 1985/86 but in later years, it starts fluctuating and goes up to 13.8% under the review period FY 2007/08 where as external debt as percentage of TR was 5.5% which has increased to 9.3 in FY 2007/08. Similarly internal debt servicing as percentage of RE was 20.5 in FY1985/86 but in later years it seems fluctuating and reached up to 13.8 in FY 2007/08. Where as external debt servicing as percentage of RE was 8.0 in FY 1985/86 which has increased to10.9 in FY 2007/08.
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The table also shows the average annual growth rate of internal & external debt servicing as % of TR are 13.5% and 11.4% whereas the average growth rate of internal & external debt servicing as % of RE are 15.6 and 13.2 respectively.

6. 4. Development expenditure, Net outstanding of public debt and debt servicing


The ratio of public debt shown upward due to the increasing trend of government expenditure. The excess utilization of public debt creates burden on the economy which has been increasing year to year. This situation eventually leads to government become more and more indebted from external and internal debt. The trend and relation of development expenditure public debt and debt servicing shown on the table below.

Table 6.4.1 Outstanding of Public Debt, Development Expenditure and Debt Servicing Rs. in Million Fiscal year Total Total debt Development (1) as % of (2) as % 0f expenditure (3) (3) outstanding servicing (3) public debt (2) (1) 1985/86 7190.2 1019.3 6213.3 115.7 16.4 1986/87 8997.4 1196.6 7378.0 121.9 16.2 1987/88 11636.6 1441.6 9428.0 123.4 15.2 1988/89 12887.9 1720.6 12328.7 104.5 13.9 1989/90 14673.1 2279.2 12997.5 112.8 20.3 1990/91 80361.2 2407.4 15979.5 502.1 15.1 1991/92 94158.8 3797.1 16512.8 570.2 23.0 1992/93 112876.8 4560.5 19413.6 581.4 23.5 1993/94 132598.0 4855.1 21188.0 625.8 22.9 1994/95 145058.8 6083.3 19794.9 732.8 30.7 1995/96 162286.2 6715.5 24980.5 649.7 26.9 1996/97 177977.6 7527.3 26542.6 632.9 28.4
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1997/98 199614.7 7682.2 28943.9 1998/99 219135.5 8723.0 28531.3 1999/00 245048.2 10032.8 30693.4 2000/01 260448.1 10355.4 33997.8 2001/02 293746.6 12205.2 31208.3 2002/03 308078.5 16181.3 31915.6 2003/04 328232.4 17338.7 33890.5 2004/05 307206.1 21897.1 40874.0 2005/06 332516.2 20348.2 43871.4 22916.3 2006/07 309232.6 56482.2 24905.1 2007/08 366004.9 69903.0 Source: Economic Survey 2007/06, MOF/N.

689.7 768.8 771.8 705.7 933.1 1043.6 968.5 751.5 757.9 547.4 523.5

32.5 30.5 33.6 28.04 28.02 55.7 51.1 53.5 46.3 40.5 35.6

Table 6.4.1 shows that the volume of outstanding public debt was Rs.10330.2 million in FY 1985/86 and has increased to Rs. 249965.4 million in 2007/08. These shows the real burden of debt in Nepal whose total outstanding of public debt as percentage of development expenditure was 115.7 percent in FY 1985/86 has gone up to 523.5% in FY 2007/08 Similarly, development expenditure has also gone up from Rs 6213.3 million in FY 1985/86 but it has been fluctuating in the middle period and end of the year it has been increased to Rs69903.0 million in FY 2007/08 Like wise, total debt servicing was 1019.3 million in FY 1985/86 and has gone up to Rs 24905.1 million in FY 2007/08. Total debt servicing as percentage of development expenditure has increased from 16.4 to35.6 percent under the review period of study. This shows that greater dependency on public debt for financing development expenditure in Nepal.

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Figure 6.4.1 Pattern of development expenditure, debt servicing and total oust. Public debt

Total outstanding public debt, Total debt Servicing & Development expenditure

400000 350000 Rs. in Million 300000 250000 200000 150000 100000 50000 0

Fiscal Year Total outstanding public debt total debt servicing Development expenditure

Source: Economic Survey 2007/06, MOF/N. The above figure shows the development expenditure is higher than total debt servicing in each fiscal year. To meet this expenditure, a heavy loan is taken by government which seems higher than expenditure in the above figure.

6. 5. Percentage of Internal debt servicing to Annual internal debt


The analysis of internal debt servicing and internal borrowing are closely related while discussing about the burden of internal debt. Internal debt decreases consumption and purchasing power of the people. The internal debt servicing losses the purchasing power of the people through taxation on one hand and increases purchasing power of the people through supply of fund or money on the other hand from banking sector. The given table shows that the aspect of internal debt servicing and proportion of annual borrowing being spent on debt servicing and also shows that the government ability to
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borrow from internal sources is not the conducive to raise enough fund for development requirement and this also shows that the increasing proportion of internal debt servicing in the manifestation of unproductive expanding of borrowed fund. Table 6.5.1 Annual Internal Debt Servicing as Percentage of Annual Internal Borrowing Rs. In Million Fiscal year Internal debt Internal debt IDS as % of ID servicing 1985/86 1403.4 733.6 52.2 1986/87 1644.7 709.6 43.1 1987/88 1130.0 905.5 80.1 1988/89 1330.0 1019.4 76.6 1989/90 2150.0 1155.6 53.7 1990/91 4552.7 1320.9 29.0 1991/92 2078.8 2132.2 102.5 1992/93 1620.0 2428.6 149.9 1993/94 1820.0 2366.4 130.0 1994/95 1900.0 3098.5 163.1 1995/96 2200.0 3411.2 155.1 1996/97 3000.0 4177.9 139.3 1997/98 3400.0 3481.0 124.3 1998/99 4710.0 3977.5 85.7 1999/00 5500.0 4711.4 85.6 2000/01 7000.0 4187.0 59.8 2001/02 8000.0 5637.7 70.5 2002/03 8880.0 8662.1 97.5 2003/04 5607.8 9431.2 168.1 2004/05 8938.1 13798.1 154.3 2005/06 11834.2 12238.1 103.41 17892.3 13321.8 2006/07 74.4 20496.4 14891.2 2007/08 72.6 Source: various issues of economic survey, MOF
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Table 6.5.1 shows that the volume of internal debt was Rs. 1403.4 million in 1985/86 and has gone up to Rs. 20496.4 million in 2007/08. Similarly internal debt servicing is also gone up from Rs. 733 million in FY 1985/86 to Rs 14891.2 million in FY 2007/08. The percentage share of internal borrowing to internal debt servicing was 52.2 percent in the review period of 1985/86. This proportion has been increasing or decreasing in later years and end of the year it has been reached to 72.6 percent in FY 2007/08.

6. 6. Issues of Foreign Loans


Nepal being an underdeveloped country is facing the serious problem of scarcity of domestic capital formation which is more essential for development process. And the country is also facing the problem of foreign exchange. So the country has borrow public debt from both internal and external sources. Because of the scarce of internal sources the scope of domestic Borrowing of Nepal is very limited. So, external borrowing is the main sources for development process of underdeveloped country like Nepal. Nepal has been facing various problems like poverty, unemployment, lack of infrastructure and its macroeconomic indicators show very low even negative growth rate and declining economic performance. Nepal has to invest huge amount of expenditure in unproductive activities. Owing to heavy reliance on external assistance in the form of borrowing in public account, Nepals external public indebtness has increased very much. A rise in external indebtness should be accompanied by increased in debts seeming capacity so that this may be undue strain in the balance of payment owing to outflow of funds through debt services which may lead to the country to the heavy burden of debt and debt crisis in the future. Although foreign loans are main pillars for development process and to break out lack of domestic capital formation, it has adverse effect on national economy.
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External debt services obvious impact on domestic capital formation and leads to reduction in the domestic standard of living unless the loans are used for financing profitable investment which yield is enough to satisfy creditors claims for debt servicing. Therefore, the true burden of debt services depends to a substantial extent in how the borrowed fund from external sources can be transformed into productive investment. If the foreign loans are used into unproductive investment project that provide present consumption with more goods than being produced in country, then it is quite impossible for the foreign debt servicing. But if foreign loans are used in productive purpose, the national income will be increased and consequently the debt servicing ability will increase.

The country has to be earned foreign currency through increasing volume of exportable goods and services for the purpose of foreign debt servicing. If this is not done, the purpose of external loan is not fulfilled. And it really becomes burden for next generation. Therefore, it is very essential that the real income of the national economy should be faster than the transfer of resources resulting from its external debt servicing for this requires ever flow of foreign trade and proper utilization of foreign loans.

Samuelson has suggested for use of foreign capital in the process of development of developing countries. He has said that, If there are many difficulties in the way of domestic financed capital formation, way not rely more heavily on foreign sources. He further said that, The economic theory tells that a country which has used up al its own high interest investment projects can take benefit and at the same time benefit a poor country abroad. (Samuelson, 1964)

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6. 7. Net Outstanding External Debt and GDP


The total amount of external debt after deducting repayment of principal and interest is called net outstanding public debt. Most part of total expenditure is fulfilled by external debt in Nepal. Since domestic resources are inadequate to meet financial requirement for the economic development foreign debt is accepted. For the external debt servicing, payment of interest and the principal requires a transfer of resources aboard rather than merely a reallocation of purchasing power among the residents. So, it may be burdensome for the country because it has to pay within the maturity period a

The volume of external debt is growing over the time simultaneously. Foreign debt and GDP are closely related to each other. If external debt is used productively it ultimately increases GDP on the one hand and on the other hand most part of the GDP goes for debt servicing if foreign debt is not utilized productively. While discussing about the burden of public debt, to analyze the trend of outstanding external debt and GDP, the figure of net outstanding external debt and GDP is shown in the table below.

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Table 6.7.1 Net Outstanding External Debt and GDP Fiscal year Net external outstanding debt (EOD) 10330.2 15171.9 20826.0 29216.9 36800.9 59505.3 70923.9 87420.8 101966.8 113000.9 128044.4 132086.8 161208 169465.9 190691.2 200404.4 220125 223433.2 232779.3 219641.5 234805.6 216200.7 249965.4 GDP Annual growth rate of EOD 53215.0 61140 46.9 73170 37.3 85831 40.3 99702 26.0 116127 61.7 144933 19.9 165350 23.2 191596 16.6 20976 10.8 239388 13.3 269570 3.2 289798 22.0 330018 5.1 366251 12.5 394052 5.1 425454 9.8 444052 1.5 473545 4.2 517993 -5.9 630300 6.4 696989 -7.9 820814 1.5 14.6 -

1985/86 1986.87 1987/88 1988/89 1989/90 1990/91 1991/92 1992/93 1993/94 1994/95 1995/96 1996/97 1997/98 1998/99 1999/00 2000/01 2001/02 2002/03 2003/04 2004/05 2005/06 2006/07 2007/08 Average annual growth rate Source: economic survey ( various issues). MOF

Rs in million EOD as % Annual growth rate of GDP of GDP 19.4 14.9 24.8 18.7 28.5 17.3 34.0 16.2 36.9 16.5 51.2 24.8 48.9 14.1 52.2 15.9 53.2 9.6 53.8 14.0 53.5 12.6 49.0 7.5 55.6 13.9 51.4 11.0 52.1 7.6 50.9 3.1 54.2 7.7 51.1 8.5 49.0 7.1 43.2 2.47 46.0 4.26 40.6 5.34 44.6 11.0 38.6

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Observing table 6.7.1 it shows the amount of total external outstanding debt was Rs10330.2 million in FY 1985/86 and has increased to Rs. 249965.4 million in FY 2007/08. Likewise, GDP has increased from Rs. 53215 million in FY 1985/86 to Rs. 560124 million in FY 2007/08. The growth rate of GDP is smaller than outstanding debt. From the above table, we can see that the external debt/GDP ratio was 19.4 percent in FY 1985/86 which has increased to 44.6 percent in FY 2007/08. This trend indicates that proportion of external debt to GDP is higher. In the review period the GDP growth rate is smaller than foreign debt growth rate.

Average annual growth rate of outstanding external debt, GDP and EOD as % of GDP are 14.6, 11.0 and38.6 percent respectively.

6. 8. Outstanding External Debt and Import


The relationship between external debt burden and import payment and their annual growth rate with the ratio of imports payment to external debt has shown in the following table (6.7).

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Table 6.8.1 Ratio of external outstanding debt and imports payments Rs In million Fiscal year Net external Import IP as % of Annual growth rate of outstanding payment (IP) EOD External Import debt (EOD) outstanding payment debt 1985/86 10330.2 9341.2 90.4 1986/87 20826.0 10905.2 71.9 46.9 16.7 1987/88 29216.9 13869.6 66.6 37.3 27.2 1988/89 36800.9 13869.6 55.7 40.3 17.3 1989/90 5950.3 18324.9 49.8 26.0 12.7 1990/91 59505.3 23226.5 39.0 61.7 26.7 1991/92 70923.9 31940.0 45.0 19.2 37.5 1992/93 87420.8 39205.6 44.8 23.3 22.7 1993/94 101966.8 51570.8 50.6 16.6 31.5 1994/95 113000.9 63679.5 56.4 10.5 23.5 1995/96 128044.4 74454.5 58.1 13.3 16.9 1996/97 132086.8 93553.4 70.8 3.2 25.6 1997/98 161208.0 89002.0 55.2 22.0 -4.9 1998/99 169456.9 87525.3 51.6 5.1 -1.7 1999/00 190691.2 108504.9 56.9 12.5 24.0 2000/01 200404.4 115687.2 57.7 5.1 6.6 2001/02 220125.6 107389.0 48.8 9.8 -7.2 2002/03 223433.2 124352.1 55.7 1.5 15.6 2003/04 232779.3 136277.1 58.5 4.2 9.6 2004/05 219641.9 149473.6 68.1 -5.6 9.7 2005/06 234805.6 173780.3 74.1 6.9 16.2 2006/07 216200.7 194694.6 90.1 -7.9 12.1 2007/08 249965.4 221937.8 88.7 15.6 14.0 52.2 19.5 15.3 Average annual growth rate
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Source: various issues of economic survey and budget speeches MOF Table 6.8.1 shows that the increasing trend of external outstanding debt from Rs.10330.2 million in FY 1985/86 to Rs.249965.4 million in FY 2007/08, which indicates the serious problem of external debt burden of Nepal. On the other hand, the magnitude of import payment was Rs.9341.2 million in 1985/86 which has increased to Rs. 221937.8 in FY 2007/08. Observing table 6.7 we can see that the import payments as percentage of external outstanding debt, was 90.4 percent in FY 1985/86. Then after there was fluctuating trend for a while and has gone up to 88.7 percent. Which indicates the more than half of external debt has transferred for import payments showing gradual increase in import of goods and services from abroad which also seriously affects the balance of payments. The average annual growth rate of EOD, IP and IP as % of EOD are 52.2, 19.5 and 15.3 respectively.

6. 9. Trend of Debt Servicing and External Debt


When the domestic resource mobilization is inadequate to meet the growing needs of development funds, the foreign assistance becomes an ultimate solution. The comparison between annual flow of external debt and its servicing is shown on the table below.

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Table 6.9.1 External debt and its servicing trends. Rs in million


Fiscal year Annual external debt (ED) 2501.1 2705.8 3815.8 5666.4 5959.6 6256.7 6816.9 6920.0 9163.3 7312.3 9463.9 9043.6 11054.5 11852.4 11812.2 12044.0 7698.6 4546.4 7629.0 9266.1 8214.4 10053.5 8979.9 Annual growth 0f ED 8.1 41.0 48.4 5.1 External debt Annual growth EDS/ED rate servicing (EDS) rate of EDS percentage 258.7 487.0 591.0 701.3 1123.6

1985/86 1986/87 1087/88 1988/89 1989/90 1990/91 1991/92 1992/93 1993/94 1994/95 1995/96 1996/97 1997/98 1998/99 1999/00 2000/01 2001/02 2002/03 2003/04 2004/05 2005/06 2006/07 2007/08
Average annual growth rate

4.9 8.9 1.5 32.4 -20.2 29.4 -4.4 22.2 7.2 -0.3 1.9 -36.0 -40.9 67.8 21.4 -11.3
22.3 -10.6 8.6

1086.5 1664.9 2131.9 2488.7 2984.7 3304.3 3349.4 4201.2 4745.5 5321.4 6201.4 6567.5 7519.2 7907.5 8099.3 9110.0
9594.5 10014.7 -

88.2 21.3 15.7 60.2 -3.3 53.2 28.0 16.7 19.9 10.7 1.3 25.4 12.9 12.1 16.5 5.9 14.4 5.16 2.4 12.4 5.3 4.3 18.0

10.3 17.9 15.4 12.3 18.8 17.3 24.4 30.8 27.2 40.8 34.9 37 38.0 40.0 45.0 51.5 85.3 165.4 103.6 84.11 98.31 95.4 111.56 52.4

Source: economic survey of different years ,MOF

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In above table, the amount of external debt in FY 1985/86 was RS. 2501.1 million which has increased to Rs.8979.9 million in FY 2007/08 with the average growth rate of 8.6 percent. Similarly, debt servicing has also reached to amount Rs.10014.7 million in FY 2007/08 from 258.7 million in FY 1985/86 with the average annual growth rate of 18.0 percent. Likewise, debt servicing as percentage of external debt has reached to 111.5 percent in the year 2007/08 which was only 10.3 percent in FY 1985/86 with average annual growth rate of 52.4 percent. These indicators threaten about its increasing burden because it is going to destroy not only large proportion of exchange earning but also rather large proportion of new borrowing or more then hundred percent of annual external borrowing transfer to the creditors countries to service the external debt per annum which has been hampered for the purpose of development expenditure.

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CHAPTER SEVEN Empirical Analysis


7. 1. Introduction
To study the impact of external debt and internal debt on the economic development of Nepal, some regression equations are made. These equations are used to analyze the cause and effect relationship between GDP with internal debt (ID) and external debt(ED). Here an attempt has to be made to analyze the relationship between public debt and GDP. For this purpose, regression equations are computed by using SPSS program. 7.1.1 GDP and Internal Debt This analysis shows the relationship between GDP and Internal debt. For this, regression equation is ` Y= a0 + a1 X1

Where, Y = GDP (Dependant Variable) X1= Internal Debt (Independent Variable) a0 a1= Regression parameters The result of this regression model is: Y = 56715.90 + 49.22X1 (1.94) (7.81 ) R2 =0.77 R2=0.76

a0 =56715.90 D-W Test = 0.73

a1 = 49.22

F-Test = 61.09

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The fitted equation above shows that there is positive relationship between GDP (Y) and Internal Debt (X1) which means when Internal Debt increases than GDP increases. The intercept term a0 (56715.90) gives the value of GDP when a1 is Zero. This result shows the slope of regression line is 49.22 which tell that one unit increase in internal debt results 49.22 unit increase in GDP. The coefficient of determination R2 is 0.77 that means 77% variation in GDP is affected by the explanatory variable i.e. internal debt. The value of R2 shows the higher goodness of fitness. Similarly Adj. R2 is found to be 0.76 indicating that 76% variation in GDP is determined by the internal debt if we also consider the degree of freedom of parameters. And the calculated F- value is greater than tabulated value so that regression equation is significant. It shows the strong association between the variables in the equation. To test the significance of regression coefficient, the t-test is with at a certain level of significance at N-1 degree of freedom. Since the calculated value of a0(56715.90) is greater than tabulated value 2.080 so it statistically significant. However the calculated t value of a1 (49.22) is greater than tabulated value so they are statistically significance. The D-W test (d) is 0.73 at 5 percent level of significance we can find the tabulated value of d1= 0.914 and du = 1.284. Thus, 0< 0.73< 0.914 or 0 < d < d1. So there exist no positive autocorrelation or the study is statistically significant. 7.1.2 GDP and External Debt The relation between GDP and External debt is represented by the equation given below. Y= a0 + a1X2 Where, Y= GDP ( Dependent Variable) X2 = External Debt ( Independent Variable) a0, a1 = Regression parameters.
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The result of this equation is Y = 15900.82 + 30.35X2 (0.20) (3.16)*

Where, a0 = 15900.82 , a1 = 30.35, R2 = 0.35 , Adj.R2 = 0.32 , F- test = 10.01 D-W Test = 0.30

* Significant at 5 percent level of significance Figures in parenthesis indicates t - values

Interpretation of the result: As shown in the equation, constant or intercept coefficient (b0) is 15900.82, which shows that GDP would Rs 15900.82 if independent variable (X1) is zero. The result shows that the slope of regression line (a1) is 30.35, which indicates that there is positive relationship between GDP and external debt in Nepal. It also states that one unit increased in external debt causes 30.25 unit increases in GDP. As R2 is 0.35, meaning that 35% change in GDP is explained by explanatory variable that is External Debt. This means 70% of variation in GDP cannot be explained by ED alone. Therefore, there must be other variables that have an influence also. Adjusted value of R2 is 0.32 which means 32 % of External Debt is influence d by GDP. Similarly, the calculated F-value is 10.01 at 5 % level of significant which is greater than tabulated F- Value which implies that the regression equation is significant. To test the significance of regression coefficient, the t-test is with at a certain level of significance
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at N-1 degree of freedom. Since the calculated value of a0 (15900.82) is greater than tabulated value 2.080 so it statistically significant. However the calculated t value of a1 (30.35) is greater than tabulated value so they are statistically significance. The D-W test (d) is 0.30 at 5 percent level of significance we can find the tabulated value of d1= 0.914 and du = 1.284. Thus, 0< 0.30< 0.914 or 0 < d < d1. So there exist no positive autocorrelation or the study is statistically significant..

7.1.3 Effects of Internal and External Debt on GDP


This analysis shows that relationship between GDP with internal and external debt. The impact of internal debt and external debt can be shown by following regression equation Y on X1 and X2 which is: Y= a0 + a1 X1 + a2 X2 The result of this regression model is Y = -42104.30 + 16.35 X1 + 42.69X2 (-1.11) (3.34)** (7.90)*

a0 = -42104.30 a1 =16.35 a2 = 42.69 R2 = 0.86 Adj. R2 = 0.84 F Test = 53.36 D-W Test = 1.05 Where, Y= GDP ( Dependent Variable) X1 = Internal Debt ( Independent Variable) X2 = External Debt ( Independent Variable) a0 , a1 , a2 = Regression parameters
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Interpretation of the result: The regression constant or intercept coefficient (a0) is -42104.30, which indicates that GDP would Rs 42104.30, if independent variable X1 and X2 are zero. This result shows that a1 or MPC of Internal debt is 16.35 when one unit increases in Internal debt (X1) causes GDP (Y)n would increase by 16.35 units. Similarly MPC or a2 of External Debt is 42.69, which explains that one unit increases in External Debt (X2) causes GDP (Y) would increase by 42.69 units. The coefficient of determination R2 is 0.86 which means that 84 percent of variation of GDP (Y) is determined by the explanatory variables i.e. Internal Debt and External Debt. Adjusted value of R2 is 0.84 which means 84 percent of Internal Debt and External Debt are influenced by GDP. Similarly, the calculated Fvalue is 53.36 at 5 percent level of significance, which is greater than tabulated F- value which implies that the model is statistically very significant. Since the calculated t value of a0 (-42104.30) is less than tabulated value 2.080 at 5 level of significance so it is statistically not significant. However the calculated t value of a1 (16.35) and a2(42.69) are greater than tabulated value at the same level of significance and degree of freedom so they are statistically significance. The D-W test (d) is 1.05 at 5 percent level of significance we can find the tabulated value of d1= 0.831 and du = 1.407. Thus, 0.831< 1.05< 1.407 or d1 < d < du. So there exist no positive autocorrelation or the study is statistically significant. 7.1.4 Effects of Total Debt on GDP This analysis shows that the relationship between GDP and Total Debt by using the following regression equation. Regression equation Y on X is: Y = a 0 + a1 X
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The result of this equation is Y = -80469.05 + 28.57X\ (-1.86) (8.11)*

Where, Y= GDP ( Dependent Variable) X = Total Debt ( Independent Variable) a0 , a1 , = Regression parameters

a0 = -80469.05, a1 =28.57, R2 = 0.78, Adj-R2 = 0.77, F Test = 65.72, D W Test = 0.81 *Significant at 1 percent level of significance Figures in parenthesis indicates t - value Interpretation of the result: As shown in the equation, GDP is dependent variable and X(TD) is independent variable. Our result depicts that one unit increase in TD causes 28.57 unit increases in GDP. Intercept term (a0) is -80469.05 which shows that GDP would Rs 80469.05, if the coefficient of independent variable, TD is zero. This result shows that MPC of Total debt is 28.57.The coefficient of determinant of determination R2 is 0.78 which means that 78 percent of variation of GDP (Y) is determination by explanatory variable i.e. TD. Adjusted value of R2 is 0.77 which means that 77 percent of total debt is influenced by GDP. Similarly, the calculated F-value is 65.72 at 5 percent level of significance which is greater than tabulated value which implies that the model is statistically very
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significant. To test the significance of regression coefficient, the t-test is with at a certain level of significance at N-1 degree of freedom. Since the calculated value of b0(80469.05) is greater than tabulated value 2.080 so it statistically significant. However the calculated t value of a1 (28.57) is greater than tabulated value so they are statistically significance. The D-W test (d) is 0.81 at 5 percent level of significance we can find the tabulated value of d1= 0.914 and du = 1.284. Thus, 0< 0.81< 0.914 or 0 < d < d1. So there exist no positive autocorrelation or the study is statistically significant.. In conclusion, the relationship between GDP and total debt , external debt and internal debt is positive. Both debts help to increase the GDP. At last this empirical findings show that impact of internal debt on GDP is stronger than external debt at current time period. So, Nepal should take consideration in taking internal debt in comparison to external debt.

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CHAPTER- EIGHT

Summary, Major Findings, Conclusion and Recommendation


8.1. Summary
Public debt has played a significant role in the financial resource for development activities. It is also widely accepted tool for financing government expenditure. It is the loan taken by the government to meet growing expenditure. Nepal is in critical phase of managing public finance because of inadequacy of internal resource.

The landlocked nature and mountainous topography of Nepal. Economically, Nepal is backward and its economic performance is not satisfactory. Now, Nepal is facing and acute resource gap problem which is also being expected to grow in coming years. Nepal is demanding more and more financial resources through public debt to bridge the growing resource gap in the budget. The fiscal deficit has been increasing in each year due to low tax payable capacity of people. This forced government to borrow budgetary deficit financing development activities and helps to achieve a higher growth rate of the economy.

Since, revenue expenditure gap, export import gap as well as saving investment gap are important factor for increasing borrowing trend, government is fulfilling such gap from two sources, internal & external. Internal debt is taken from treasury bills, special bonds, national saving certificates and development bonds through banking sector. External debt received from bilateral and multilateral sources, ADB, UNDP, IMF,WB,etc. are the institutions of multilateral sources and the proportion of loan from such institutions is large in Nepal only through internal resources, it is not sufficient to promote the rapid development of the Nepalese economy. Thus external debt is also
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taken for development activities. Public debt is also taken to achieve the goals of high employment, price level stability, balance in foreign accounts and an acceptable rate of economic growth. Internal debt plays important role in the financing fiscal deficit and in the growth of monetary are not sufficient to meet such fiscal imbalance. Thus government has to depend upon external borrowing.

Nepal is indebted by both internal and external loans buy highly indebted by external servicing. Thus, its proper management has been a challenging task for Nepal. So the government should be responsible to utilize the public debt in productive sector rather than unproductive sectors. The government regulates the better fiscal policy and concern in the proper implementation. Otherwise, Nepal is going to face debt crisis in the future in which debt bearing obligations would become impediments to the balanced management of the economy. Being a least developed country, Nepal is incurring public debt. Although, the trend of continuous increase in public debt is not good economic indicator for Nepal. Public debt is important source to mobilize resource as well as socio-economic development of the country.

8. 2. Major Findings Revenue deficit has increased to Rs. 53727.4M in 2007/08 than previous years. This shows the revenue mobilization has not been satisfactory is relation to the increasing trend of government expenditure. The average annual growth rate of government revenue and government expenditure is 14.8% and 12.7% respectively. Although the growth rate of revenue is higher than revenue. This shows the widening financial resource gap, which creates fiscal deficit. Fiscal has

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also shows in increasing trend year by year under the period of study. Fiscal deficit is fulfilled by loans and grants. Saving Investment gap has shown in increasing trend up to FY 2004/05,than after it seems decreasing and in FY 2007/08 it is Rs.48029 M with average annual growth rate of 6.3%. Where investment is greater than saving. This is because, in Nepal, the saving capacity of people is very low due to low level of income. In spite of low saving, to keep the economic activities ahead, government has to borrow capitals. Because of low saving, low fund, government has to borrow invest on development activities. In FY 2007/08, the amount of internal debt (Rs. 20496.4m) is greater than the amount of external debt (Rs.8979.9m). but average annual growth rate of internal debt (35.9%) is lower than average annual growth rate of external debt (60.6%). This shows the greater dependency on foreign loan.

The sources of financing deficit are loan and grants. The total public debt has increased from Rs. 3904.5 m in FY 1985/86 to Rs. 29476.3m in FY 2007/08. The internal debt as percentage of fiscal deficit has gone up to 61.4% but external debt has decreased to 26.8 % in FY 2007/08 with average annual growth rate of 28.2% and 46.5% as compared to previous years. This shows the contribution of external loan to fiscal deficit is out paced the share of internal loan but the growth rate shows the decreasing trend of external and increasing trend of internal debt as percentage of fiscal deficit. Foreign debt also plays important role to meet Fiscal Deficit.

Government received internal debt from Treasury Bills, Development Bonds, National Saving Certificates and Special Bonds. Treasury Bill provides short
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term financial requirement for the government having 3 months to one year. National Saving Certificates, Development bonds and Special Bonds etc are the long term financial requirement having the maturity period of 5-7 years. Government received Internal debt of 78.7% from Treasury bill, 18.7% from Development bond, 1,4% from National Saving Certificates and 1.1% from Special bonds in FY 2007/08.

During the study period, multilateral loan (Rs.8347.77m) is greater than bilateral loan(Rs.6321.1m). The foreign grants and loans are the major source of foreign currency for Nepal, facing the problem of revenue deficiency. The basic rationale of foreign assistance is to promote domestic growth and long term economic development.

In FY 207/08, the amount of outstanding

internal loan (Rs.116039.5m) is

seemed lower than the amount of outstanding external loan (Rs.24965.4m). Similarly, the percentage share of outstanding internal debt (14.5%) is also lower than the percentage of outstanding external debt (42.0%). This shows heavy dependency on foreign loan due to low saving because of low per capita income of people in UDCs like Nepal .

Due to increasing of burden of debt, the trend of total debt servicing of Nepal is also increasing. In FY 2007/08, the total debt servicing is Rs.249051.1m. in the same period, the average annual share of percentage of internal debt servicing is more than external debt servicing to Total debt. This shows the larger amount of total debt is spending for internal debt servicing.
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The percentage share of internal debt servicing to total revenue and regular expenditure are 13.8% and 13.8%. similarly, the percentage share of external debt servicing to total revenue and regular expenditure are 9.3% and 10.9%, which shows the burden of internal debt and external debt in terms of total revenue and regular expenditure has increased not considerably over the period.

Development expenditure has been increasing in each fiscal year. In 1985/86, development expenditure was Rs. 6213.3 million which is increased to Rs. 69903.0 million in the review period. Total outstanding public debt is also increasing from 7190.2 million in FY 1985/86 to Rs. 366004.9 million in 2007/08. According to this total debt servicing also seems increasing in each fiscal year.

The percentage share of internal debt servicing to internal debt was 52.2% in FY 1985/86 and it is 72.6 % in last year of review period. This shows that governments ability to borrow from internal sources is not conducive to raise enough funds for development requirement.

In FY 1985/86, external outstanding debt as percentage of GDP was 19.4% which is 44.6% in FY 2007/08 with 38.6% average annual growth rate. This shows clearly about the burden of external debt which is quite heavy.

The payment on import has increased from Rs. 9341.2 million in FY 1985/86 to Rs 221937.8 million in last year of review period of FY 2007/08 with 19.5%

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average annual growth rate. This clearly shows that the increase in external debt is accompanied by gradual increase in import of goods and services.

The external debt servicing as percentage of external debt was 10.3% in FY


1985/86 and it is 111.56% in FY 2007/08 with 52.4% average annual growth rate. Similarly, the average annual growth rate of internal debt and external debt servicing have 8.6% and 18.0% respectively. The indicators raise fear about its increasing burden because it is going to devour not only large proportion of exchange earning but rather large proportion of new borrowing too.

While considering the empirical result of regression equation of GDP on ED


and ID, the regression constant is -42104.30, regression coefficient of ED (b1) is 16.35 and coefficient of ID(b2) is 42.69. Similarly, R2 = 0.86, Adj R2 = 0.84, F-Test = 53.36 and D-W Test = 1.05, which indicate that there is strong and position relationship between public debt and GDP of Nepal. It implies that the increment and deincrement in GDP depend upon the public debt. And the impact of internal debt on GDP is stronger than external debt at current time period.

8. 3. CONCLUSION
This study has analyzed the impact of increasing trend of government borrowing on economic development. The government expenditure has increased more rapidly than government revenue due to limited sources of revenue. So the government has borrowed from internal and external sources. The growing trend of borrowing creates a great problem for debt management and becoming major challenging issue for the country. The borrowing money is unlikely financed on

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the non- monetized and unproductive sectors of the economy which in turn has the burden for the country.

The degree of indebted of the external debt has increased, due to the poor mobilization of internal resources, widening investment saving gap, export import gap, revenue expenditure gap and large amount of fiscal deficit. So there has been excessive flow of foreign loans to bridge up these gaps. Consequently, burden of debt and debt servicing obligation are increase rapidly in each year but debt servicing capacity of the economy is not increasing in the same pace.

In course of research, it was found that government borrowing has been increased unlikely and financed mostly on the unproductive sectors including uncertainties, high expenditures and hence government always lacks the resources then borrows the new loan to pay the previous ones. Thats why, the public debt and its interest is nothing rapidly, but addressing capacity for redemption the debt is not increasing in the same pace.

The study clearly shows the facts that the average annual share of outstanding debt as percentage of GDP is 58.1 percent. It concluded that we are entrapped in the debt net. If debt management is not set effectively and effective programs for debt financing are not carried out, we shall not escape from the situation of debt trap.

During the period of the study between FY1985/86 to FY 2007/08. It id concluded that the average annual growth rate of GDP and revenue are considerably low as compared with that debt and its servicing obligation and

the most of the borrowed funds are using in productive sectors. Because of
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misuse of borrowed fund, other things remaining same, there are symptoms of steadily falling into the trap soon. Any country and it is widely accepted measure for financing for financing government expenditure.

The empirical results confirm that stock of internal, external. And total debt has not caused negative impact t on GDP growth of Nepal. That is why it is better to take the loan for the economic development but it should be proper utilized on productive sectors otherwise debt trap will drag us to the path of difficult situation from where we cannot escape from it.

8. 4. Recommendations
On the basis of above findings, the following recommendation are proposed to address the problems of debt financing in Nepal 1. Maintain Fiscal Imbalance: The size of revenue collection is very low and expenditure is very high which creates fiscal imbalance. This leads to heavy borrowing from internal and external sources. So for reducing the volume of borrowing and maximizing revenue collection, government should adopt transparent and effective tax policy by improving tax administration. Government should maintain fiscal imbalance by applying strong fiscal and monetary policy. Which might contribute to control growing unproductive and useless expenses in one side and increased revenue towards mobilizing internal resources and thus to reduce dependency on loans for financing development expenditure. Government should maintain the strong fiscal discipline by setting and implementing the effective legal system to control ever increasing corruption,
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unnecessary expenses, improper allocation of resources etc. So that domestic can increase, which encourage government to invest on its infrastructure and development projects. 2. Revenue Mobilization: Effective, competent and improved revenue administration can contribute to increased revenue mobilization. Thus, there is a need of skill oriented and refresher training as well as the improvement in organizational structure and administrative procedures. Such effort helps to reduce foreign dependency a little in future.

Tax Revenue is the main source of government revenue. In this regard, it is need to raise the tax revenue by widening the tax base, refining the tariff structure at regular intervals. This can contributes to more revenue mobilization. In order to increase revenue, sectors of comparative advantages need to be identified, prioritized and promoted for import substitution and export promotion so that national economy can expand.

3.

Domestic Saving: The growth rate of investment is increasing and the rate of domestic saving is not increasing in the same pace and investment saving gap is also increasing. Thus there is need to reduce such gap by increasing the rate of total domestic saving through effective policy measures. To encourage people for saving, banks adopt some effective schemes such as gift scheme, double scheme etc. Banks should established in proper place. So that people can easily deposit. So that National income can increase.

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4.

Mobilization of Internal and External Borrowing: Government must be used external and internal borrowing on such projects which are highly productive and can contribute to pay back principle and interest and to help to generate the capital formation. For this, projects with adequate homework before its implementation and to reduce the cost of the projects, accountability and transparency is to be needed. The internal borrowing mobilization for development purpose has come from banking sector which creates inflation. So government should try to minimize borrowing form banking sector and should initiate policies to attract maximum borrowing from non banking sector and there should be put legal ceiling on government overdrawing from the bank.

5.

Export- Import: The level and direction of export is limited within two products and a few countries. So there is need to export promotion and diversifying trade both country wise and commodity wise. And there should be controlled to import luxuries good and services by adopting suitable import policy and reduce huge trade deficit by promoting the export oriented industries and there by narrowing the ever increasing gap between total export and import.

6.

Debt Servicing: To increase the debt servicing capacity, government should increase GDP growth, revenue growth and export earning growth in sustainable path so that country will not trapped on debt servicing problem. Burden of foreign debt servicing on internal revenue has been raising due to the increasing use of foreign aid in the development works. To keep the foreign debt
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servicing liability within sustainable limit special focus to increasing national saving rate, avoiding as well as containing unproductive current expenditure, and making the development expenditure more productive is warrented.

7.

Reduced foreign Dependency: To reduce dependency, various measure must be applied such as export promotion, tourist attraction and import of capital goods should be increased for the productive purpose. Foreign or External debt dependency can be reduced to a greater extent through the productive use of incoming remittance. The government should implement all possible measures to bring the remittance in the financial system.

8.

The government should try to get grants more and more as far as possible. There is more domination on bilateral grants. The government also should maintain such external policy so that more grants should be received than the loans.

9.

In order to generate employment, it is necessary to formulate special plans/programmes for the development and extension of service oriented industries with new dimension of vocational training. Such areas can be tourism, information and communication technology (ICT)etc. It can contribute substantially to increase national income.

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APPENDIX

LINEAR REGRESSION MODEL


S.N Variable Result coefficient Dept. Indept a0 a1 a2 Regression R2 Adj.R T-test
2

F-test

D-W test

a0

a1

a2

1.

GDP

ID

56715. 90

49.2 2 30.3 5 28.5 7

0.77

0.76

1.96 7.81

61.09

0.73

2.

GDP

ED

15900. 82

0.35

0.32

0.20 3.16

10.01

0.30

3.

GDP

TD

80460 9.05

0.78

0.77

1.86

8.11

65.72

0.81

GDP

ID

ED

42104. 30

16.3 5

42.6 9

0.86

0.84

1.11

3.34

7.9 0

0.84

1.05

Where, Dept. = Dependent variable Indept. = Independent variable R2 refers to the coefficient of multiple determinations Adj. R2 refers to the coefficient of multiple determinations.

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